Question

In: Economics

Indicate in each of the following instances whether the specified circumstances will cause a worker to...

Indicate in each of the following instances whether the specified circumstances will cause a worker to want to work more or fewer hours:
1. The wage rate increases and the substitution effect is greater than the income effect.
2. The wage rate decreases and the income effect is greater than the substitution effect.
3. The wage rate decreases and the substitution effect is greater than the income effect.
4. The wage rate increases and the income effect is greater than the substitution effect.

Expert Solution

Wage rate impacts Number of working hours and number of working hours depends upon Substitution effect and Income effect.

A.The wage rate increases and the substitution effect is greater than the income effect

Since wage rate increases;

Substitution effect : Due to increase in Wage rate , now worker will tend to work more by giving up leisure as Now working more will give higher reward.

Thus, Increase in Wage rate will make a Worker work more.

Income effect. : As wage rate increases, The income of Worker Increases .As the income Increases, Worked will work less as now while working less he can maintain its Income.

Thus, Increase in Wage rate will make a worker work less/ for few hours.

Now, Since Substitution effect is greater than Income effect, Increase in Wage rate will make Worker work more .

B..The wage rate decreases and the income effect is greater than the substitution effect.

As wage rate decreases,

Substitution effect : Due to decrease in Wage rate , now worker will tend to work less by as now working less have less reward and less incentive to work.

Thus, decrease in Wage rate will make a Worker work for few hours/ or less

Income effect. : As wage rate decreases, The income of Worker decreases. As income Decreases, Worker will work more as now in order to increase or maintain its income,a worker has to work more

Thus, decrease in Wage rate will make a worker work more .

Now, Since Income effect is greater than Substitution effect, Increase in Wage rate will make Worker work more .

C The wage rate decreases and the substitution effect is greater than the income effect.

As wage rate decreases,

Substitution effect : Due to decrease in Wage rate , now worker will tend to work less by as now working less have less reward and less incentive to work.

Thus, decrease in Wage rate will make a Worker work for few hours/ or less

Income effect. : As wage rate decreases, The income of Worker decreases. As income Decreases, Worker will work more as now in order to increase or maintain its income,a worker has to work more

Thus, decrease in Wage rate will make a worker work more .

Now, Since Substitution effect is greater than Income effect, Increase in Wage rate will make Worker work less or for few hours

d. The wage rate increases and the income effect is greater than the substitution effect.

Since wage rate increases;

Substitution effect : Due to increase in Wage rate , now worker will tend to work more by giving up leisure as Now working more will give higher reward.

Thus, Increase in Wage rate will make a Worker work more.

Income effect. : As wage rate increases, The income of Worker Increases .As the income Increases, Worked will work less as now while working less he can maintain its Income.

Thus, Increase in Wage rate will make a worker work less/ for few hours.

Now, Since Income effect is greater than Substitution effect, Increase in Wage rate will make Worker work less/for few hours.

Rahul Sunny answered 2 years ago

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