Question

Answer the following by True(T) or False (F)

1. The short-run relationship between labor supply and real wage is more likely to be represented by an upward-sloping labor supply curve than by a downward-sloping one.

2. The long-run relationship between labor supply and real wage is more likely to be represented by an upward-sloping labor supply curve than by a downward-sloping one.

3. According to the data on the long-run trend of the average number of hours worked, the substitution effect appears to dominate the income effect.

4. For long term changes in the real wage, the income effect is likely to be stronger than the substitution effect.

5. For short term changes in the real wage, the income effect is likely to be stronger than the substitution effect.

6. Suppose that the government imposes a lump-sum tax of 20,000 dollars on every adult (i.e., every adult pays 20,000 dollars irrespective of their income). According to the income effect, this will likely increase labor supply.

7 .Suppose that the government gives out a lump-sum transfer of 20,000 dollars to every adult (i.e., every adult receives 20,000 dollars irrespective of their income). According to the income effect, this will likely increase labor supply.

8. According to the income effect, an increase in wealth is likely to shift the labor supply curve to the left (upward).

Answer 1

Q(1)

As in the case of short-run resources are always unutilized thus creating a lot of unemployment worker in the society looking for a job but in the short run as the demand can be met because generally, the price remains the same so the wage will also remain the same thus the increase in the demand can be meet by employing the more number of worker either at the same wage or at the lower wage rate which will lead to a Downward-sloping labor supply curve

Answer - False

Q(2)

In the long-run, the supply curve slopes upward because in the long run most of the resources are utilized and now the economy is at saturation point and thus to increase the supply however it would be difficult to increase supply in the long run but even though it can be done only by providing an extra increased wage to the worker because in the economy most of the resources are utilized we have to pay more thus it will be an upward sloping curve , reflecting the higher price needed to cover the higher marginal cost of production. The higher marginal cost arises because of diminishing marginal returns to the variable factors.

Answer - True

Q(3)

So if the wages of the worker are increased above a certain set of limits then definitely they would prefer to take leisure rather then the work in the firm thus we can say in the long run substitution effect appears to dominate the income effect.

Answer - True

Q(4)

For long term changes in the real wage, the income effect is likely to be less strong than the substitution effect because now worker would prefer to take leisure rather than the work in the firm

Answer - False

Q(5)

For short term changes in the real wage, the income effect is likely to be stronger than the substitution effect because now all know that the increase in the wage rate is for a specific short time period and they can utilize this time to earn more for the future saving

Answer - True

Q(6)

So if a government imposes a lump-sum tax of 20,000 dollars on every adult (i.e., every adult pays 20,000 dollars irrespective of their income). According to the income effect, this will likely increase labor supply because now as they have to pay a tax they have to earn more and it requires more labor time

Answer - True

Q(7)

So if the government gives out a lump-sum transfer of 20,000 dollars to every adult (i.e., every adult receives 20,000 dollars irrespective of their income). According to the income effect, then they will decrease the labor supply because now they have enough money without even working

Answer - False