Question

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State whether the following statements are true or false. Shortly explain your answer in 1-2 sentences. a) In the neoclassical model of leisure-labour choice indifference curves can be upward sloping.

b) In the basic model of individual labor supply, the introduction of a proportional tax rate on labor income will decrease hours worked.

c) The life cycle model of labor supply predicts that (unexpected) transitory increases in the wage rate lead to an increase in hours worked).

d) In a perfectly competitive model, the labor supply elasticity plays no role in determining how much of a payroll tax imposed by the government on the firms is shifted to the worker.

Answer 1

a) In the neoclassical model of leisure-labour choice indifference curves can be upward sloping.

FALSE.

Both the wage and leisure are considered as good. If indifference curve would be upward sloping it implies that a consumption of more C and more L would yeild same level of utility as consumption with less of C and less of L. This clearly contradicts the assumption that both (wage and leisure) gives utility.

b) In the basic model of individual labor supply, the introduction of a proportional tax rate on labor income will decrease hours worked.

TRUE

Proportional tax rate implies the more the earnings (wage) the more will be the taxes. This reduces the utility of wage as compared to leisure and hence will discourage workers and will decrease hours worked.

c) The life cycle model of labor supply predicts that (unexpected) transitory increases in the wage rate lead to an increase in hours worked).

TRUE

Labor supply respond to unexpected increase and shocks whether they are permanent or transitory.

d) In a perfectly competitive model, the labor supply elasticity plays no role in determining how much of a payroll tax imposed by the government on the firms is shifted to the worker.

FALSE.