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Chapter 6: 10QQ (page 133)

Maude鈥檚 labor-supply curve slopes upward if, for Maude,

  1. leisure is a normal good

  2. consumption is a normal good

  3. the income effect on leisure exceeds the substitution effect.

  4. the substitution effect on leisure exceeds the income effect.

Short Answer

Expert verified

The correct option is d) the substitution effect on leisure exceeds the income effect.

Step by step solution

01

Explaining the labor supply curve

The labor supply curve is upward when the income is low and downward sloping when the income is high. The labor supply curve is shown below:

At a low level of income, the substitution effect is more than the income effect; thus, the labor supply increases with a rise in income. Leisure becomes more costly, and a person prefers working more. This is the upward sloping phase of the labor supply curve.

When the income is very high, the income effect dominates the substitution effect. People find working as an inferior good and, hence, increase the consumption of normal good, enjoying more leisure activities. This is where the downward sloping phase of labor supply curve occurs.

Thus, a labor supply curve is upward sloping only when the substitution effect is greater than the income effect.

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Most popular questions from this chapter

Consumption when young and consumption when old are both normal goods for Seymour, a worker saving for retirement. When the interest rate falls, what happens to Seymour鈥檚 consumption when old?

a. It definitely increases.

b. t definitely decreases.

c. It increases only if the substitution effect exceeds the income effect.

d. It decreases only if the substitution effect exceeds the income effect.

Marge buys pizza for \(10 and Pepsi for \)2. She has income of \(200. Her budget constraint will experience a parallel outward shift if.

a. the price of pizza falls to \)5, the price of Pepsi falls to \(1 and her income falls to 100.

b. the price of pizza rises to \)20, the price of Pepsi rises to \(4 and her income remains the same.

c. the price of pizza falls to \)8, the price of Pepsi falls to \(1 and her income rises to \)240.

d. the price of pizza rises to 20, the price of Pepsi rises to \(4 and her income rises to \)500.

Praxilla, who lived in ancient Greece, derives utility from reading poems and from eating cucumbers. Praxilla gets 30 units of marginal utility from her first poem, 27 units of marginal utility from her second poem, 24 units of marginal utility from her third poem, and so on, with marginal utility declining by three units for each additional poem. Praxilla gets six units of marginal utility for each of her first three cucumbers consumed, five units of marginal utility for each of her next three cucumbers consumed, four units of marginal utility for each of the following three cucumbers consumed, and so on, with marginal utility declining by one for every three cucumbers consumed. A poem costs three bronze coins but a cucumber costs only one bronze coin. Praxilla has 18 bronze coins. Sketch Praxilla鈥檚 budget set between poems and cucumbers, placing poems on the vertical axis and cucumbers on the horizontal axis. Start off with the choice of zero poems and 18 cucumbers, and calculate the changes in the marginal utility of moving along the budget line to the next choice of one poem and 15 cucumbers. Using this step-by-step process based on marginal utility, create a table and identify Praxilla鈥檚 utility-maximizing choice. Compare the marginal utility of the two goods and the relative prices at the optimal choice to see if the expected relationship holds. Hint: Label the table columns: 1) Choice, 2) Marginal Gain from More Poems, 3) Marginal Loss from Fewer Cucumbers, 4) Overall Gain or Loss, 5) Is the previous choice optimal? Label the table rows: 1) 0 Poems and 18 Cucumbers, 2) 1 Poem and 15 Cucumbers, 3) 2 Poems and 12 Cucumbers, 4) 3 Poems and 9 Cucumbers, 5) 4 Poems and 6 Cucumbers, 6) 5 Poems and 3 Cucumbers, 7) 6 Poems and 0 Cucumbers

Homer buys pizza for \(10 and Pepsi for \)2. He has income of \(100. His budget constraint will shift inward if.

a. the price of pizza rises to \)12.

b. the price of Pepsi falls to \(1

c. his income rises to \)150

d. the price of pizza, the price of Pepsi and his income all rise by 50 percent.

Pick a point on an indifference curve for wine and cheese and show the marginal rate of substitution. What does the marginal rate of substitution tell us?
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