Review questions for Midterm 2

# Review questions for Midterm 2 - Econ 1100 Lise Vesterlund...

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Econ 1100 Lise Vesterlund Review Questions Second Midterm Chapter 8.1-8.7: Slutsky Equation 1. For a given price change what does the income effect measure? 2. For a given price change what does the substitution effect measure? 3. What is the sign of the substitution effect? 4. What is the sign of the income effect? 5. Are all ordinary goods inferior goods? Explain 6. Are all Giffen goods inferior goods? Explain 7. Are all inferior goods Giffen goods? Explain 8. Draw a picture illustrating the income and substitution effect for a price increase when two goods are perfect complements. How large is the substitution effect? 9. Draw a picture illustrating the income and substitution effect for a price increase when two goods are perfect substitutes. How large is the substitution effect? 10. Find the income, substitution and total effect when the price of good x increases from p x =1 to p’ x =2 when income is m=100 and x=m/(2 p x ). First find the original demand when p x =1 . Determine how large an income is required if the consumer were to buy the old bundle at the new price, m’ . What is optimal demand at m’ and p’ x ? How much does the consumer demand at p’ x =2 and m=100 ? Chapter 9.8 - 9.9: Labor Supply 1. Let w denote the wage rate and p the price of other goods. Draw a picture of an individual’s budget constraint over L leisure, and C consumption. How does this budget line change when wage increases? 2. Assume that leisure is a normal good and explain why an increase in wage may result in people working fewer hours? Be sure to use the Slutsky equation and explain the sign of the income and substitution effect. 3. When does the labor supply curve have a positive slope? When is it negative? 4. When do we know for certain that an increase in the tax on labor will increase the tax revenue that we are collecting from this source? When might we see an increase in tax causing revenue to decrease? 5. Explain why overtime is more effective in increasing labor supply than a straight increase in wages

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