Problem Set 3 Economics 151a, Winter 2010 Due Tuesday 1/26/10, 12:10 pm 1. Illustrate the income and substitution effects of a decrease in the wage on quantities of consumption goods and leisure in the following cases. Clearly state the income, substitution, and total effect on leisure, hours of work, and consumption. If the effect is ambiguous, state that. a. An individual who always works more when his wage increases. b. An individual who always works less when his wage increases. c. Which effect (income or substitution) is larger for the individual in case a? in case b? 2. Blau & Kahn estimate women’s labor supply elasticities of around .88 in the 1980s, and men’s labor supply elasticities of around .10 during the same period. a. If this is the only information available to you about the shape of the labor supply curve, draw (on the same graph) a labor supply curve for men and for women. b.
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