Question

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Q.) State whether the following statements are true or false. Shortly explain your answer in 1-2 sentences.

a) In the basic model of individual labor supply, if leisure is a normal good, an increase in non-labor in-come will reduce hours worked.

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 cross-elasticity of factor demand measures how sensitive the demand for a particular input factor (e.g. employment) is to changes in its own price.

d) In the long run a competitive firm chooses the optimal level of output by setting MC=p.

Answer 1

Q.a) TRUE:- INCREASE IN NON LABOR INCOME HAS AN OPPOSITE EFFECT. IT CAN FORCE AN INDIVIDUAL TO EXIT THE LABOR MARKET OR TO REDUCE THEIR WORKING HOURS. IF LEISURE IS A NORMAL GOOD THE AMOUNT OF LEISURE CAN ONLY RISE AND HOURS WORKED CAN ONLY FALL

b) FALSE:- AN INTRODUCTION OF PROPORTIONAL TAX RATE ON LABOR INCOME MEANS THAT THERE IS NO TAX SLAB THAT IS TAX RATE IS FIXED HENCE  WILL AFFECT THE INCOME OF THE LABORERS WHICH IN RESULT WILL GO DOWN BECAUSE OF TAX IMPOSITION. THEREFORE THE HOURS WORKED WOULD INCREASE TO INCREASE THEIR WAGES PER HOUR AND RESULTING IN HIGHER INCOME

C) FALSE:- CROSS ELASTICITY OF DEMAND MEASURES THE RESPONSE OF THE QUANTITY DEMANDED OF A GOOD TO THE EFFECT OF CHANGE IN PRICE OF ANOTHER GOOD. THEREFORE THE STATEMENT IS FALSE BECAUSE IT DOES NOT TAKES INTO ACCOUNT THE OWN PRICE CHANGE OF GOOD

d) TRUE:- THE OPTIMUM LEVEL OF OUTPUT STATES THAT THE PROFIT IS MAXIMUM WHEN THE QUANTITY PRODUCED IS ACCORDING TO MC=MR THAT IS MARGINAL COST IS EQUAL TO MARGINAL REVENUE. THEREFORE, SETTING THE EQUATION MC=P FOR PRODUCING OPTIMUM LEVEL OF OUTPUT IS CORRECT.