Explain how the optimal combination of work and consumption changes after a decline in the wage...

Explain how the optimal combination of work and consumption changes after a decline in the wage rate. (It would be helpful for you to practice graphing this in the consumer’s problem)

Expert Solution

In my opinion, when the wage of the labor decrease or increase , its widely effect the consumption as well as work of labor, because

When income decrease the consumer will shift the preference of food like earlier he eat normal good, after decreasing income he eat inferior good, vice versa .

When income decline to then it will find the new work for stable the earning so that he live the life as before he live when income cant decline . Or he decrease the expenses.

The wage or income effect expresses the impact of changes in purchasing power on consumption, while the substitution effect describes how a change in relative prices can change the pattern of consumption of related goods that can substitute for one another.

The optimal condition is when , he have a stable job,so that his earning is stable and consumption is according to hi earning.

Stable job mean he cant change frequently job because change of job gives uo and down in income and it badly impact th consumption.

Rahul Sunny answered 3 weeks ago

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