ec151a_wnter2010_ps2_ak

ec151a_wnter2010_ps2_ak - 3 a This is a simple income...

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3) a) This is a simple income transfer. There is no substitution effect only an income effect. Since both Leisure and C (all other goods) are normal goods we should see an increase in both L and C unambiguously. b)
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This is both an increase in income and a decrease in the wage. The increase in income would yield both an increase in L and C as seen in (a). A decrease in wage will decrease consumption unambiguously as both the income and substitution effect leads to a decrease in C. However, for leisure the wage affect alone is ambiguous. Income effect would lead to less L as there is less income to spend in general. Substitution effect would show in increase in L since leisure is less expensive relative to all other goods. Thus, for both C and L one cannot say for sure whether they increase or decrease. c) This case is best split into two cases depending on the initial optimal point being before or after L^. Originally L<L^.
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ec151a_wnter2010_ps2_ak - 3 a This is a simple income...

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