Using the concept of income and substitution effects, explain how you might react to each of the following:
(a) You currently work 20 hours a week at $10 per hour and your employer tells you he must reduce your wage to $8 per hour.
(b) The price of pizza doubles and the price of hamburgers remains constant.
(a) A reduction in the wage rate could either cause hours worked to increase or decrease, depending on whether the income or substitution effect is stronger.
(b) If the price of pizza doubles, the consumer's real income decreases, so the consumer would eat less pizza. Because the price of hamburgers remains constant, the consumer will substitute hamburgers for pizza
You might also like to view...
Which of the following can prevent markets from reaching the efficient level of production? I. a monopoly II. taxes III. the product is a public good
A) I and II B) II C) II and III D) I, II and III
Why are music, television, and movie companies concerned about their products being posted to Internet Web sites such as YouTube?
What will be an ideal response?
An improvement in technology would
a. enable the economy to produce outside its original production possibilities frontier b. enable the economy to move along its original production possibilities frontier c. eliminate scarcity; therefore, the production possibilities frontier would no longer exist d. have no effect on the production possibilities frontier e. change the production possibilities frontier to a line with a positive slope
A reduction in consumption spending due to the lay-off of 2,000 defense-industry workers?will ultimately have a larger overall impact on real GDP due to the multiplier effect
Indicate whether the statement is true or false