chapter 6 book: Supply of Labor to the Economy: The Decision to Work

Question 1

in the labor force

Answer 1

When a person actively seeks work

Question 2

labor force participation rate

Answer 2

the percentage of a given population that either has a job or is looking for one

Question 3

what or working hours determined by?

Answer 3

labor demand from employers

employee preferences on the supply side of the mar- ket, especially in the long run

Question 4

the labor supply preferences of employees is. more crucial to satisfy in the long run or in the short run?

Answer 4

in the long run

Question 5

where short-run changes in hours of work come from?

Answer 5

from the demand side of the market

Question 6

what are the three factors that affect the demand for a good?

Answer 6

1. The opportunity cost of the good (which is often equal to market price)
2. One’s level of wealth
3. One’s set of preferences

Question 7

work or leisure

Answer 7

the discretionary time we have (16 hours a day)

Question 8

What is the opportunity cost of leisure?

Answer 8

the opportunity cost of an hour of leisure is equal to one’s wage rate

the extra earnings a worker can take home from an extra hour of work

ex: The cost of spending an hour watching television is basically what one could earn if one had spent that hour working

Question 9

wealth

Answer 9

family’s holdings of bank accounts, financial investments, and physical property

Workers’ skills

Question 10

what is easier to measure, wealth itself or the returns from that wealth?

Answer 10

the returns from that wealth because data on total income are readily available from government surveys

Question 11

what do economists often use as an indicator of total wealth?

Answer 11

Economists often use total income

Question 12

the income effect

Answer 12

the response of desired hours of leisure to changes in income, with wages held constant

if income increases, holding wages constant, desired hours of work will go down

as incomes rise, holding leisure’s opportunity cost constant, people will want to consume more leisure (which means working less)

if income is reduced while the wage rate is held constant, desired hours of work will go up

Question 13

how can the income effect be expressed as?

Answer 13

in terms of the supply of working hours as well as the demand for leisure hours

Question 14

what is the formula of the income effect?

Answer 14

(Delta H / Delta Y) | W_ < 0

the change in hours of work (H_) produced by a change in income (Y_), holding wages constant (W_)

Question 15

why do we say that the income effect is negative?

Answer 15

because the sign of the fraction in the equation is negative

If income goes up (wages held constant), hours of work fall.

If income goes down, hours of work increase

The numerator (Delta H) and denominator (Delta Y) move in opposite directions

Question 16

substitution effect with rising wages and income held constant

Answer 16

as the cost of leisure changes, income held constant, leisure and work hours are substituted for each other

if income is held con- stant, an increase in the wage rate will raise the price and reduce the demand for leisure, thereby increasing work incentives

a decrease in the wage rate will reduce leisure’s opportunity cost and the incentives to work, holding income constant

Question 17

why is the substitution effect with rising wages and income held constant positive?

Answer 17

Because this effect is the change in hours of work (H_) induced by a change in the wage (W_), holding income constant (Y_)

Question 18

formula of the substitution effect with rising wages and income held constant

Answer 18

(Delta H / Delta W) | Y_ > 0

the numerator (Delta H) and denominator (Delta W) always move in the same direction

Question 19

can the income and substitution effects happen at the same time?

Answer 19

yeee boyyy

Question 20

if somebody gets a wage increase, explain the income effect and substitution effect both happening

Answer 20

The income effect is the result of the worker’s enhanced wealth (or potential income) after the increase

For a given level of work effort, he or she now has a greater command over resources than before

The substitution effect results from the fact that the wage increase raises the oppor- tunity costs of leisure

Question 21

what is the labor supply response?

Answer 21

the sum of the income and substitution effects

Question 22

if somebody gets a wage increase, what happens if the income effect is stronger?

Answer 22

the person will respond to a wage increase by decreasing his or her labor supply because he got wealthier

it would not be to the same extreme than If his wealth increased to to something other than wage rate (like inheritance)

the substitution effect is present and acts as a moderating influence, but not large enough to prevent labor supply from declining

the person’s labor supply curve will be negatively sloped

Question 23

if somebody gets a wage increase, what happens if the substitution effect is stronger?

Answer 23

the actual response to wage increases will be to increase labor supply

the person’s labor supply curve will be positively sloped

Question 24

backward-bending curve resulting from increase in wages

Answer 24

he person’s desired hours of work increase (substitution effect dominates) when wages go up as long as wages are low (below W*)

slope is positive facing upwards

At higher wages, however, further increases result in reduced hours of work (the income effect dominates)

slope is negative facing downwards

Question 25

how are money and leisure substitutes to each other?

Answer 25

Since both leisure and money can be used to generate satisfaction (or utility)

If forced to give up some money income (by cutting back on hours of work, for example) some increase in leisure time could be substituted for this lost income to keep a person as happy as before

Question 26

indifference curve

Answer 26

weird ass curve that connects the various combinations of money income and leisure that yield equal utility

each point on the curve yields equal utility

Question 27

do indifference curves intersect?

Answer 27

nah bruuuv

Question 28

what is the slope of an indifference curve?

Answer 28

negatively sloped because if either income or leisure hours are increased, the other is reduced in order to preserve the same level of utility

Question 29

what does it mean when there is a loss of income when the indifference curve is steep?

Answer 29

no need for a large increase in leisure hours to keep utility constant

Question 30

what does it mean when there is a loss of income when the indifference curve is relatively flat?

Answer 30

a given decrease in income must be accompanied by a large increase in the consumption of leisure to hold utility constant

Question 31

indifference are convex or concave?

Answer 31

Indifference curves are convex (steeper at the left than at the right)

Question 32

which is more valued when leisure is scare and income is abundant?

why?

Answer 32

leisure is more highly valued

a great loss of income can be compensated for by just a little increase in leisure

a little loss of leisure time would require a relatively large increase in income to maintain equal utility

What is relatively scarce is more highly valued

Question 33

which is more valued when income is scare and leisure is abundant?

why?

Answer 33

income is more highly valued

Losing income would require a huge increase in leisure for utility to remain constant

what is relatively scarce is assumed to be more highly valued

Question 34

the budget constraint

Answer 34

reflects the combinations of leisure and income that are possible for the individual

Question 35

what does it mean when a combination is to the right of the budget constraint?

Answer 35

Any combination to the right of the budget constraint is not achievable

the person’s command over resources is simply not sufficient to attain these combinations of leisure and money income

Question 36

what does the slope of the budget constraint represent?

what is the formula?

Answer 36

a graphical representation of the wage rate

One’s wage rate is properly defined as the increment in income (Delta Y) derived from an increment in hours of work (Delta H)

Wage rate = (Delta Y) / (Delta H)

Question 37

if a mans gets an increase in income, but wage rate remains the same, what does this result in graphically?

Answer 37

creates a parallel budget constraint higher than the pervious one

since its parallel, the got the same slope because wage remained unchanged

this then would create a higher indifference curve because he now has more control over resources

it later results, in the income effect

Question 38

how does an income increase result in an income effect now that we take into consideration indifference curve and budget constraints?

Answer 38

Income (wealth) has been increased, but the wage rate has remained unchanged

wealth increased and the opportunity cost of leisure remained constant, so the person consumes more leisure and works less

the new budget constraint is tangent to the new indifference curve at a spot where there are more hours of leisure, and less hours of work

Question 39

if the wage increase, it can create an either a substitution effect or a scale effect

what defines which effect it will be?

Answer 39

the shape of the indifference curves that might describe a person’s preferences

Question 40

Is it possible to graphically isolate the substitution effect?

Answer 40

yeeee

Question 41

The reservation wage

Answer 41

the wage below which a person will not work

it represents the value placed on an hour of lost leisure time

Question 42

who is more responsive to wages changes? men or women?

Answer 42

women

Question 43

are women becoming more or less responsive to wage changes?

Answer 43

less responsive to wage changes

Question 44

income replacement programs

Answer 44

they pay benefits only to those who are not working

Question 45

income replacement programs with a spike

Answer 45

it makes the person receiving the benefit not want to work

they get around the same wage for no time working and max amount of leisure time

their utility or indifference curve has more potential (moves to the right)

Question 46

Programs with Net Wage Rates of Zero

Answer 46

factor income needs into their eligibility criteria

pay benefits based on the difference between one’s actual earnings and one’s needs

paying people the difference between their earnings and their needs creates a net wage rate of zero

they increase the income of program recipients while also drastically reducing the price of leisure

Question 47

How does a subsidy work

Answer 47

the welfare agency determines the income needed by an eligible person

Actual earnings are then subtracted from this needed level, and a check is issued to the person each month for the difference

Question 48

why does a subsidy lead to the income effect?

Answer 48

increases the income of the poor by moving the lower end of the budget constraint

Question 49

why does a subsidy cause the wage to effectively drop to zero?

Answer 49

every dollar earned is matched by a dollar reduction in welfare benefits

Question 50

why does the dollar-for-dollar reduction in subsidy benefits result in a income effect?

Answer 50

Those accepting welfare to reduce their hours of work to zero

in this case, their max utility is not working and getting money

Question 51

can it be possible that someone eligible to subsidies choose not to take them and work instead because it benefits them?

what do they give up?

Answer 51

yes it can happen

they will not get any subsidy or welfare

Question 52

what can lifetime limited do?

how?

Answer 52

have the effect of ending eligibility for transfer payments

forcing recipients off welfare

by inducing them to leave so they can “save” their eligibility in case they need welfare later in life

Question 53

work requirements for benefits

Answer 53

people need to work a certain minimum of hours of work per day to be eligible

if he chooses to work more than that amount per day, they won’t get the benefit

Question 54

the Earned Income Tax Credit (EITC) program

Answer 54

makes income tax credits available to low-income fami- lies with at least one worker

EITC functions as an earnings subsidy

seen by many as an income maintenance program that preserves work incentives

Question 55

with the Earned Income Tax Credit (EITC) program, what do workers with earnings below $12,570 experience? why?

Answer 55

a substitution effect that pushes them in the direction of more work

the net wage is greater than the market wage (by 40 percent)

workers experience an increase in the price of leisure

some of those who would have been out of the labor force in the absence of the EITC program will now decide to seek work

Question 56

Workers who earned between $12,570 and $16,420 with the Earned Income Tax Credit (EITC) program experience what?

Answer 56

they just earn the going market wages

np increase in the value of leisure

Question 57

Workers who earned between $16,420 and $40,295 with the Earned Income Tax Credit (EITC) program experience what?

Answer 57

the experience both the income and the substitution effects that push in the direction of reduced labor supply

Question 58

exogenous independent variable

Answer 58

determined by some outside force and not itself influenced by the dependent variable