Question

Your friend Conrad currently works in the local grocery store. He works 32 hours per week and is paid an hourly wage of $ 18 per hour. While he is not allowed to work more than 40 hours per week, Conrad can choose to work any number of hours between 30 and 40 hours. Conrad is going to get a raise to $ 20 per hour next week. When you relate this fact to your economics professor, he assures you that Conrad will choose to work more than his current 32 hours per week after receiving the wage increase. Should you agree with your professor’s confident assertion? Why or why not?

Answer 1

I agree with the confident assertions made by the professor, because with rise in the wage from $18 to $20, the real wage per hour increases. It causes, the opportunity cost of leisure time of Conard to increase. It makes Conard to opt for more hours of work than 32 hours of work. It is termed as the substitution effect, where Conard opts for more hour of work when wage increases.

Though, there is an income effect as well, as increased wage, will make Conard to get lifestyle level at the lower number hour of works as well. But, Conard has only 40 hours available to work in a week, and afterwards Conard has the leisure time. So, income effect will be smaller than the substitution effect. It is the reason that Conard will finally work for more than 32 hours in a week, as the professor has suggested.