Question

1. A million dollar lottery winner decides to quit working. How can you explain this behavior using economics?

2. How does outsourcing affect wages and unemployment in the short run and the long run?

3. If workers became more productive (produced more output in the same amount of time), what would happen to the demand for labor, the wages of labor, and the number of workers employed?

4. Why is it difficult to determine the amount of wage discrimination in the workplace?

5. Which anti-poverty program (welfare, in-kind transfer, or EITC) creates the strongest incentive for recipients to work? Why?

Answer 1

1.

It is considered as an income effect, where an increase in the income due to the winning of a lottery,  leads to increase in the demand for leisure. So, opportunity cost of each hour of work increases. It makes the people to opt for spending time as leisure and they do not work.

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2.

The outsourcing causes moving of works in the overseas locations that are cheaper. It will cause unemployment to increase and wage level to decrease in the short run where more people are available for few jobs. Though, in the long run, unemployment will come back to the natural level as workers will go for the structural improvements and acquire new skills to get into new jobs that can be on the higher side of the value chain. But it will be at a lower wage rate that it should be in the long run due to the outsourcing.

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3.

If workers become more productive, then their marginal product of labor as well as their marginal revenue product of labor will increase. It will cause their wage level to increase as it is directly related to their productivity. Further, workers will be in more demand, because  marginal product of labor per unit of dollar spent, will increase. So, more number of workers will be employed with increase in labor productivity.

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