Problem Set 1 fall07 - Explain. (3 points) #5) Suppose an...

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PAM 204- Problem Set #1 #1) Suppose the substitution effect dominates the income effect. If the wage falls, hours worked will increase or decrease . You can just give a one word answer. (2 points) #2) Suppose the income effect dominates the substitution effect. If the proportional wage tax falls, hours worked will increase or decrease . You can just give a one word answer (2 points) #3) In class, we have argued that leisure is a normal good. If leisure is an inferior good, can the labor supply curve be backward-bending? Explain. (3 points) #4) Suppose a study finds that individuals who were working before winning the lottery dropped out of the labor force after winning the lottery. Can one conclude from this study that the labor supply curve is downward-sloping?
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Unformatted text preview: Explain. (3 points) #5) Suppose an individual has no non-labor income. Originally the individual works some positive number of hours when the wage equals W1. Suppose now that the wage falls to W2 and the income effect dominates the substitution effect. On one graph with income on the vertical axis and leisure on the horizontal axis, graphically depict the income effect by itself and the substitution effect by itself in this situation. State the separate effects the income effect and the substitution effect will have on labor supply when the wage falls. What will be the overall effect of the wage decrease on this individuals labor supply? (Use the method we used in class to solve this problem.) (10 points)...
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This note was uploaded on 03/30/2008 for the course PAM 2040 taught by Professor Lewis during the Fall '07 term at Cornell University (Engineering School).

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