Principles of Economics- Mankiw (5th) 469

Principles of - CHAPTER 21 THE THEORY OF CONSUMER CHOICE 483 in the lottery see large increases in their incomes and as a result large outward

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CHAPTER 21 THE THEORY OF CONSUMER CHOICE 483 in the lottery see large increases in their incomes and, as a result, large outward shifts in their budget constraints. Because the winners’ wages have not changed, however, the slopes of their budget constraints remain the same. There is, therefore, no substitution effect. By examining the behavior of lottery win- ners, we can isolate the income effect on labor supply. The results from studies of lottery winners are striking. Of those winners who win more than $50,000, almost 25 percent quit working within a year, and another 9 percent reduce the number of hours they work. Of those winners who win more than $1 million, almost 40 percent stop working. The income effect on labor supply of winning such a large prize is substantial. Similar results were found in a study, published in the May 1993 issue of the Quarterly Journal of Economics, of how receiving a bequest affects a person’s la- bor supply. The study found that a single person who inherits more than
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This note was uploaded on 07/30/2010 for the course ECON 120 taught by Professor Abijian during the Spring '10 term at Mesa CC.

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