Chp3Review - AP/ECON3240: Review Material for chapter 3 A....

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Benjamin: Labour Market Economics 6e Instructor’s Manual 3-1 AP/ECON3240: Review Material for chapter 3 A. Required Reading: Textbook (BGLR) pp. 81-90 B. Answers to End-of-Chapter Review Questions Review questions 1-3 on page 111. 1. This can be seen by examining Figure 3.1. The income level at the post-demogrant equilibrium E d is higher than that associated with E o . The reason underlying this result is the income effect. As income rises, she purchases more leisure, which is a normal good. She will thus work fewer hours, and income earned from working will fall. Total income, including both the demogrant and the earned income, will rise. (See Figure 3.1 on page 84 of the text) 2. If the individual is genuinely disabled, there are no work disincentives. He/she is constrained to work 0 hours, which means that he/she will locate on the right edge of the income/leisure diagram under any economic circumstances. Regardless of the amount of the demogrant (the compensation payment), he/she will always be located on that edge at H f hours of leisure in figure 3.8. The equilibrium occurs at the intersection (there will not be a tangency) between the wage constraint line, which for this person is only a point whose coordinates are ( H f , the amount of the demogrant), and the highest possible indifference curve.
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Benjamin: Labour Market Economics 6e Instructor’s Manual 2-2 3a. Unwilling to go on welfare because the welfare payment is too low: The wage constraint line is tangent to an indifference curve which is higher than the indifference curve which touches the corner of the wage constraint line at the right corner of the diagram. In other
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This note was uploaded on 02/05/2012 for the course ECON 4140 taught by Professor A during the Spring '11 term at York University.

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Chp3Review - AP/ECON3240: Review Material for chapter 3 A....

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