Econ1100Lise VesterlundReview Questions Second MidtermChapter 8.1-8.7: Slutsky Equation1.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? Explain6.Are all Giffen goods inferior goods? Explain7.Are all inferior goods Giffen goods? Explain8.Draw a picture illustrating the income and substitution effect for a price increase whentwo goods are perfect complements. How large is the substitution effect?9.Draw a picture illustrating the income and substitution effect for a price increase whentwo goods are perfect substitutes. How large is the substitution effect?10.Find the income, substitution and total effect when the price of good xincreases frompx=1to p’x=2when income is m=100 and x=m/(2px). First find the original demandwhen px=1. Determine how large an income is required if the consumer were to buy theold bundle at the new price, m’. What is optimal demand at m’and p’x? How much doesthe consumer demand at p’x=2and m=100?Chapter 9.8 - 9.9: Labor Supply1.Let wdenote the wage rate and pthe price of other goods. Draw a picture of anindividual’s budget constraint over Lleisure, and Cconsumption. How does this budgetline change when wage increases?2.Assume that leisure is a normal good and explain why an increase in wage may result inpeople working fewer hours? Be sure to use the Slutsky equation and explain the sign ofthe 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 taxrevenue that we are collecting from this source? When might we see an increase in taxcausing revenue to decrease?5.Explain why overtime is more effective in increasing labor supply than a straight increasein wages
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