Question

Suppose the real wage rate w increases from w0 to w1. Using a graph explain income...

Suppose the real wage rate w increases from w0 to w1.

Using a graph explain income and substitution effects of an increase in the real wage (similar to the graph we considered when examining the demand). Let leisure be on the x-axis and consumption on the y-axis; an increase in real wage translates to a change in the slope of the budget constraint.

Consider two cases when, as a result, the demand for leisure increases and when the demand for leisure decreases.

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

sol;

.Initial equilibrium is at e0 . After increase in wage rate new equilibrium is at e1 . L0 L2 is substitution effect and L2 L1 is income effect . Demand for leisure has increased after rise in wage rate.

Initial eqilibrium is at e0 . After increase in wage rate new eqilibrium is at e1 . Substitution effect is L0 L2 and income effect is L2 L1. Demand for leisure has decreased after increase in wage rate.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Consider a one-period closed economy, i.e. agents (consumers, firms and government) live for one period, consumers...
Consider a one-period closed economy, i.e. agents (consumers, firms and government) live for one period, consumers supply labor and demand consumption good, whereas their utility function is in the form of log(C−χN1+ν/1+ν ) (GHH preference). Firms supply consumption good and demand labor and their production function is y = zN^1−α. The government finances an exogenous spending via lump-sum taxes. Suppose there is a positive shock on χ which means the consumers favor leisure (or dislike labor) by much more than...
Santi derives utility from the hours of leisure (l) and from the amount of goods (c)...
Santi derives utility from the hours of leisure (l) and from the amount of goods (c) he consumes. In order to maximize utility, he needs to allocate the 24 hours in the day between leisure hours (l) and work hours (h). Santi has a Cobb-Douglas utility function, u(c, l) = c 2/3 l 1/3 . Assume that all hours not spent working are leisure hours, i.e, h + l = 24. The price of a good is equal to 1...
Santi derives utility from the hours of leisure (l) and from the amount of goods (c)...
Santi derives utility from the hours of leisure (l) and from the amount of goods (c) he consumes. In order to maximize utility, he needs to allocate the 24 hours in the day between leisure hours (l) and work hours (h). Santi has a Cobb-Douglas utility function, u(c,l) = c2/3l1/3. Assume that all hours not spent working are leisure hours, i.e, h + l = 24. The price of a good is equal to 1 and the price of leisure...
1. Show a consumer’s budget constraint and indifference curves for soda drinks and slices of pizza....
1. Show a consumer’s budget constraint and indifference curves for soda drinks and slices of pizza. Show the optimal consumption choice. If the price of soda drinks is $1.50 per can and the price of a slice of pizza is $2 per slice, what is the marginal rate of substitution at the optimum? 2. Suppose the income elasticity of demand for food is 0.5 and the price elasticity of demand is −0.25. Suppose also that Mia spends $10,000 a year...
1. Show a consumer’s budget constraint and indifference curves for soda drinks and slices of pizza....
1. Show a consumer’s budget constraint and indifference curves for soda drinks and slices of pizza. Show the optimal consumption choice. If the price of soda drinks is $1.50 per can and the price of a slice of pizza is $2 per slice, what is the marginal rate of substitution at the optimum? 2. Suppose the income elasticity of demand for food is 0.5 and the price elasticity of demand is −0.25. Suppose also that Mia spends $10,000 a year...
Amy has income of $M and consumes only two goods: composite good y with price $1...
Amy has income of $M and consumes only two goods: composite good y with price $1 and chocolate (good x) that costs $px per unit. Her util- ity function is U(x,y) = 2xy; and marginal utilities of composite good y and chocolate are: MUy = 2x and MUx = 2y. (a) State Amy’s optimization problem. What is the objective function? What is a constraint? (b) Draw the Amy’s budget constraint. Place chocolate on the horizontal axis, and ”expenditure all other...
An income consumption curve shows what happens to the consumer's consumption of good X as nominal...
An income consumption curve shows what happens to the consumer's consumption of good X as nominal income increases and Group of answer choices the price of X falls. the prices of X and Y stay constant. the price of Y falls. real income stays constant. Flag this Question Question 5 5 pts If you were selling a product in a setting where incomes were rapidly rising, which of the 4 Engel curve slopes listed below would you prefer for your...
1. Tom Hanks starred in a movie called Castaway. At the beginning, he lives near the...
1. Tom Hanks starred in a movie called Castaway. At the beginning, he lives near the beach, hoping to be rescued, but it means he currently has to carry drinking water from a stream a half-mile away. As hopes of being rescued fade, he decides to move closer to the stream, so he will not have to carry the water supply so far each day. Analyze the effect of moving closer to a water supply on the allocation of time...
1. Which is the most accurate definition of the study of economics? [1] Distributing surplus goods...
1. Which is the most accurate definition of the study of economics? [1] Distributing surplus goods to those in need. [2] Dealing with affluence in a morally bankrupt world. [3] Using scarce resources to satisfy unlimited human wants. [4] Reducing human wants to eliminate the problem of scarcity. 2. Computer software represents [1] labour. [2] land. [3] capital. [4] entrepreneurship. 3. Suppose you have graduated with a degree in accounting and are offered a job with an accounting firm. But...
Total utility can be objectively measured in numbers that indicate usefulness or benefit to the consumer....
Total utility can be objectively measured in numbers that indicate usefulness or benefit to the consumer. ____ 2. Consumers should purchase quantities of a good to the point where MU > P. ____ 3. Voluntary exchange requires that there must be mutual gain. ____ 4. Points along a budget line represent the maximum combinations of two commodities that a consumer can afford. ____ 5. The budget line represents a consumer's preferences for a commodity. ____ 6. A change in consumer...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT