Chapter 6 Flashcards
Why does a country’s economic performance depend on the willingness of people to work?
It depends on the willingness of people to work because labour is the most abundant and important factor of production
How can a person’s discretionary time (16h a day) be spent?
Working for pay to derive income or on leisure
What does demand for goods and services depend on?
It depends on the opportunity cost of the good, one’s level of wealth, and one’s set of preferences
What does the demand for leisure depend on?
It depends on the opportunity cost of leisure
What does the opportunity cost of leisure equal to?
It equals to the wage rate or the extra earnings a worker can take home from an extra hour of work
What does wealth and income include?
it includes family’s holdings of bank accounts, financial investments, and physical property or properties
What are the effects of increases in income and wages on leisure work?
They are the income effect and the substitution effect
What is the income effect?
The income effect is when if income increases, holding wages constant, desired hours of work will go down
What is the substitution effect?
It is when, if the income is held constant, an increase in the wage rate will raise the price and reduce the demand for leisure thereby increasing work incentives
How will a worker respond to a wage increase when the income effect dominates?
They will react by decreasing their labor supply
How will a worker respond to a wage increase when the substitution effect dominates?
They will increase their labor supply
What are the characteristics of the indifference curve?
Consumer preferences are usually northeast on the higher or highest indifference curve
Indifference curves do not intersect
Indifference curves are negatively sloped
Indifference curves are convex
Moving down on the indifference curve reflect value
Indifference curves differ among individuals because of the differences in tastes/preferences or values
What do budget constraints demonstrate?
They demonstrate the combinations of money income and the hours of leisure per day that are possible or attainable for the individual
When would the income effect be observed?
It would be observed if nonlabor income increased and the person supplied 0 hours of work to the labor market
If nonlabor income is zero or unchanged and the wage rate increased, this would cause both an income effect and a substitution effect to do what?
A worker will increase their hours of work to the labor market when the substitution effect dominates
or
A worker will reduce their hours to the labour market if the income effect dominates
What is the difference between the substitution effect and the income effect of a wage increase?
It is the shape of the indifference curves
What can raise a worker’s utility level?
Any given wage increase
What is the reservation wage?
It is the wage below which a person will not work in the labor market
How can social insurance compensation programs affect the work-incentives of workers?
They can affect the work-incentives of workers because the returns associated with the first hour of work are negative, therefore there is a reduced income for returning to work for 1 hour
What can policy makers do in order to minimize the effects of work disincentive problems caused by income maintenance programs?
Set no-work benefits at some fraction of pre-injury earnings
Set benefits at Ag so that a worker is on their pre-injury indifference but with earnings less than E0 or set benefits slightly less than Ag so that a worker will be eager to return to work as soon as they are physically able to do so
Set an upper limit on the weeks each unemployment worker can receive the no-work benefits
What is the payment of benefits based on?
It is based on the difference between actual earnings and needs
How does the welfare agency determine the income needed by an eligible person?
Family size
Area living costs
Local welfare regulations
