Practice Exam Questions Notes Chapter 2

Question 1

If something is in addition to salary it is?

Answer 1

Non-labour income

Question 2

What happens with an increase in non-labour income?

Answer 2

consume more leisure + consume more of the consumption good - income effect

Question 3

Why is there no substitution effect with non-labour income?

Answer 3

It doesn’t effect the wage rate

Question 4

What would a worker do if they wanted to consume more leisure?

Answer 4

retire at an earlier age

Question 5

What is a tax on pension income?

Answer 5

Decrease in non-labour income

Question 6

What type of goods do we assume leisure and consumption are?

Answer 6

Normal goods

Question 7

What happens with a decrease in non-labour income?

Answer 7

Income effect - workers chooses to consume less leisure and less of the consumption good
No substitution effect - as wages aren’t affected

Question 8

What does a tax on pension income do to the value of the worker’s retirement portfolio?

Answer 8

It reduces the value of their portfolio

Question 9

We assume pension benefits are not what?

Answer 9

‘Wages’

Question 10

What does an increased tax rate do to the slope

Answer 10

results in a flatter slope