Question

Ember (E) and Rajan (R) are a couple with individual productivities in both the market and their home. Each has 10 hours per day to devote to work. E can earn $9 per hour in the market, and can produce goods worth $8 per hour at home. R can earn $12 per hour in the market, and can produce goods worth $6 per hour at home. Market-produced goods cost $5 per unit. Suppose Ember and Rajan together initially chose a bundle of the two types of goods requiring Ember to work part time in both the market and their home. One effect of the COVID-19 lockdown was that Ember's return from market labour was reduced to $7 per hour, or $70 per day. Nothing else changed. Given their initial choice, how would you expect the allocation of the couple's labour to change as a result of this? Explain this, using income and substitution effects.

Answer 1

Solution

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