Economics 3203 – Fall 2010 Problem Set # 4: Labor Supply Due Wednesday, Oct. 6 (in class) 1. A hairdresser has gone through several wage and hour changes at her job. When she first started at the salon, she received a wage of $13/hour and worked 36 hours/week. The following year, in the face of other growing expenses, her employer cut her wage to $11/hour, and the hairdresser increased her hours to 38 hours/week instead. Some time later, her employer hoped to increase her hours to 40/week; he reduced the hairdresser’s wages to $9/hour, reasoning that a $2 reduction in the past had increased the hairdresser’s work by 2 hours/week. To the employer’s surprise, the hairdresser responded to the wage reduction by asking if she could reduce her weekly hours. Explain how the hairdresser could be making a reasonable decision, and use the concepts of income and substitution effects in your answer. 2. Simon values both leisure and consumption. His utility derived from any combination of
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