8&9- labour supply I & II

Question 1

Time (T) equation

Answer 1

working hours (H) + non-working hours (N)

Question 2

utility function

Answer 2

U = U(Y, N)

Question 3

Time constraint

Answer 3

H = 24 - N

Question 4

total income function

Answer 4

Y = wH + Y*

Question 5

deriving labour supply

Answer 5

Find tangency point on IC and BC
Max U = U(Y,N) = U(wH, 24-H)
First order condition for an interior max
Key condition: MRS= -Un/Uy= -w=MRT

Question 6

increase in wage on IE and SE

Answer 6

IE and SE increase

Question 7

wage increase on IE

Answer 7

work less

Question 8

wage increase on SE

Answer 8

work more

Question 9

total effect of wage increase

Answer 9

work less, negative; IE dominates

Question 10

what type of good is leisure

Answer 10

neither inferior nor normal, increase in Y means leisure can increase or decrease

Question 11

backwards bending supply curve caused by

Answer 11

higher wage, different effects dominate at different portions of the supply curve

Question 12

leisure as inferior, SE?, IE?, TE?

Answer 12

SE: H up, N down. IE: H up N down, TE: H up N down

Question 13

leisure as a normal good; SE?, IE?, TE?

Answer 13

SE: H up, N down. IE: H down N up, TE?

Question 14

leisure as normal, substitution elasticity and income elasticity?

Answer 14

SE > 0, IE < 0

Question 15

total elasticity. =

Answer 15

income elasticity + substitution elasticity

Question 16

overtime payments

Answer 16

worker gets x% premium on normal wage rate w1

Question 17

progressive income tax on budget line

Answer 17

affects budget line (more work = higher labour income, and higher tax at certain thresholds)

Question 18

fall in tax rate on labour supply

Answer 18

IE dominates, reduction in labour supply

Question 19

upwards sloping labour supply on hrs worked

Answer 19

lowering tax wages = decreased hrs worked

Question 20

backwards bending supply curve on hrs worked

Answer 20

lowering after tax wages = increased hrs worked

Question 21

govt revenue from tax τ labour income is:

Answer 21

T= τwH[(1-τ)w]= τwH(ω)

Question 22

differentiating T equation shows

Answer 22

shows how income tax revenue changes as tax rate increases

Question 23

effects of change in marginal tax rate

Answer 23

govt collects more tax revenue from higher tax rate. change in tax rate alters hrs worked

Question 24

can direction of change in tax rate be predicted

Answer 24

no, not with theory alone

Question 25

income tax revenue and labour supply relationship

Answer 25

non-linear

Question 26

some groups have higher replacement rates due to

Answer 26

generous UI benefits, social assistance, high marginal tax rates for groups in labour market

Question 27

poverty trap

Answer 27

little increase in net income despite increase in gross income (due to tax and benefits reduction)

Question 28

benefits and participation decision

Answer 28

some voluntarily unemployed (tax/benefit rates influence this)

Question 29

replacement rate def

Answer 29

proportion of expected income from work replaced by unemployment and related welfare benefits

Question 30

replacement rate =

Answer 30

OA / OB (income when unemployed / expected income of beginning to work)