Chapter_02_v2

Chapter_02_v2 - Part 1 - Getting Started Chapter 2 Tools of...

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Part 1 - Getting Started Chapter 2 – Tools of Positive Analysis 1. A change in the marginal tax rate changes the individual’s net wage. This generates both an income effect and a substitution effect. As long as leisure is a normal good, these effects work in opposite directions. Hence, one cannot tell a priori whether labor supply increases or decreases. If there were no political or legal impediments, an experimental study could be conducted in which a control group confronts the status quo, and an experimental group faces the new tax regime. Other things that affect work effort would impact both the control group and the experimental group, so any difference in work effort between the two groups could be attributed to the change in marginal tax rates. 2. This is a valid criticism of the exercise study. It reflects the problem of causality. Two things may be correlated, but it can be difficult to determine which causes the other. The remedy would be to set up a study in which individuals are randomly assigned to groups. In an experimental study, the group engaged in running would not be correlated with good health or a strong heart, so if they enjoyed longer life expectancy, it could be attributed to running instead of other factors. 3.
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Chapter_02_v2 - Part 1 - Getting Started Chapter 2 Tools of...

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