Question 1

Use the following to answer questions
Figure: Income and Leisure Opportunities 
-(Figure: Income and Leisure Opportunities) Given Keisha's preferences and opportunities for income and leisure shown in the figure Income and Leisure Opportunities, Keisha sees leisure as:
A) a normal good.
B) an inferior good.
C) a complement to working.
D) The answer is impossible to determine with the information given.

Accepted Answer

According to the figure, as Keisha's income increases, she is willing to work less and increase her leisure time. This implies that leisure is a preferred good, and therefore a normal good.

Question 2

While individual labor supply curves may bend backward, market labor supply curves are likely to be upward-sloping throughout, since higher wages induce new workers to enter the labor market.

Accepted Answer

This statement is true. The individual labor supply curve can bend backward for certain individuals, meaning that they may choose to work less as their wages increase beyond a certain point. However, at the market level, an increase in wages generally attracts new workers to enter the labor force, resulting in an upward-sloping labor supply curve.

Question 3

Use the following to answer questions 
Figure: Davina's Labor Supply Choice 
-(Figure: Davina's Labor Supply Choice) The figure Davina's Labor Supply Choice shows Davina's time allocation budget line when her hourly wage is $10 or $15 and she has 80 hours to allocate between labor and leisure; it also shows two of her indifference curves for income and leisure. When Davina earns $15 per hour, she works _____ hours and enjoys _____ hours of leisure.
A) 20; 60
B) 30; 50
C) 40; 40
D) 50; 30

Accepted Answer

The answer of Use the following to answer questions 
Figure:...

Question 4

Use the following to answer questions 
Figure: Joanna's Time Allocation Budget Line 
-(Figure: Joanna's Time Allocation Budget Line) The figure Joanna's Time Allocation Budget Line depicts what happens when she can choose how to spend 40 hours. What is Joanna's wage rate?
A) $10.00
B) $12.50
C) $40.00
D) $15.00

Accepted Answer

The answer of Use the following to answer questions 
Figure:...

Question 5

Use the following to answer questions 
Figure: Joanna's Time Allocation Budget Line 
-(Figure: Joanna's Time Allocation Budget Line) Joanna's Time Allocation Budget Line depicts what happens when she can choose how to spend 40 hours. If Joanna's wage rate increases and she ends up working MORE hours:
A) leisure became relatively more expensive.
B) leisure became relatively less expensive.
C) leisure did not change in price.
D) she does not know how to allocate her time effectively.

Accepted Answer

When Joanna's wage rate increases and she ends up working MORE hours, her opportunity cost of leisure increases, making leisure relatively more expensive. This shifts her budget line inward, making it steeper. Therefore, leisure becomes relatively more expensive.

Question 6

Use the following to answer questions 
Figure: Davina's Labor Supply Choice 
-(Figure: Davina's Labor Supply Choice) The figure Davina's Labor Supply Choice shows Davina's time allocation budget line when her hourly wage is $10 or $15 and she has 80 hours to allocate between labor and leisure; it also shows two of her indifference curves for income and leisure. Davina's labor supply curve is _____ as her hourly wage rises from $10 to $15.
A) upward-sloping
B) downward-sloping
C) vertical
D) horizontal

Accepted Answer

Davina's labor supply curve is downward-sloping as her hourly wage rises from $10 to $15. This is because as her wage increases, the opportunity cost of leisure increases, inducing her to work more hours and allocate less time to leisure. So, she moves along the budget line to a new bundle with more labor and less leisure.

Question 7

Alex's wage rate falls. Holding everything else constant, Alex's new time allocation budget line will:
A) shift in toward the origin, parallel to the old one.
B) shift away from the origin, parallel to the old one.
C) rotate to the left on the x-axis.
D) rotate down on the y-axis.

Accepted Answer

The answer of Alex's wage rate falls. Holding everything else...

Question 8

Use the following to answer questions 
Figure: Davina's Labor Supply Choice 
-(Figure: Davina's Labor Supply Choice) The figure Davina's Labor Supply Choice shows Davina's time allocation budget line when her hourly wage is $10 or $15 and she has 80 hours to allocate between labor and leisure; it also shows two of her indifference curves for income and leisure. As Davina's hourly wage rises from $10 to $15:
A) the income effect is greater than the substitution effect.
B) the substitution effect is greater than the income effect.
C) the substitution effect is equal to the income effect.
D) It is impossible to compare the income and substitution effect.

Accepted Answer

The answer of Use the following to answer questions 
Figure:...

Question 9

Use the following to answer questions 
Figure: Rita's Time Allocation Budget Line 
-(Figure: Rita's Time Allocation Budget Line) Look at the figure Rita's Time Allocation Budget Line. It is based on 80 hours available for labor and leisure. If her hourly wage doubles, the new time allocation budget line will have a point at _____ hours of leisure and _____ in income.
A) 30; $1,000
B) 40; $400
C) 50; $700
D) 60; $280

Accepted Answer

The original budget line has a slope of -4 (Δlabor/Δleisure = -80/20 = -4). 
If the hourly wage doubles, her income will double for any given hour of labor.
Therefore, the new budget line will have a slope of -8 (Δlabor/Δleisure = -80/10 = -8).
We can find the intercept of the new line by plugging in the numbers:
80 = -8leisure + income
80 = -8leisure + 2wage*leisure
80 = leisure(-8 + 2wage)
leisure = 80 / (-8 + 2wage)

Since wage doubled, new wage = $40/hour
leisure = 80 / (-8 + 2(40)) = 60
income = 80 - (-8*60) = $280
Therefore, the new budget line will have a point at 60 hours of leisure and $280 in income.

Question 10

Use the following to answer questions 
Figure: Joanna's Time Allocation Budget Line 
-(Figure: Joanna's Time Allocation Budget Line) The figure Joanna's Time Allocation Budget Line depicts what happens when she can choose how to spend 40 hours. What is the opportunity cost of an hour of leisure?
A) $10.00
B) $12.50
C) $40.00
D) $15.00

Accepted Answer

The answer of Use the following to answer questions 
Figure:...

Question 11

If leisure is a normal good for Randy, then both the substitution effect and the income effect of a decrease in the wage rate will cause Randy to work fewer hours.

Accepted Answer

The answer of If leisure is a normal good for...

Question 12

Use the following to answer questions 
Figure: Rita's Time Allocation Budget Line 
-(Figure: Rita's Time Allocation Budget Line) Look at the figure Rita's Time Allocation Budget Line. It is based on 80 hours available for labor and leisure. If her hourly wage doubles, the vertical intercept will be:
A) $1,120.
B) $1,400.
C) $1,600.
D) $2,000.

Accepted Answer

The answer of Use the following to answer questions 
Figure:...

Question 13

Use the following to answer questions 
Figure: Rita's Time Allocation Budget Line 
-(Figure: Rita's Time Allocation Budget Line) Look at the figure Rita's Time Allocation Budget Line. It is based on 80 hours available for labor and leisure. Rita chooses 40 hours of leisure and income of $280. When her hourly wage doubles, Rita chooses 30 hours of leisure and income of $700. The substitution effect is making her work _____, the income effect is making her work _____, and the substitution effect is _____ than the income effect.
A) more; less; stronger
B) less; more; stronger
C) more; less; weaker
D) less; more; weaker

Accepted Answer

The answer of Use the following to answer questions 
Figure:...

Question 14

Use the following to answer questions 
Figure: Davina's Labor Supply Choice 
-(Figure: Davina's Labor Supply Choice) The figure Davina's Labor Supply Choice shows Davina's time allocation budget line when her hourly wage is $10 or $15 and she has 80 hours to allocate between labor and leisure; it also shows two of her indifference curves for income and leisure. When Davina earns $10 per hour, she works _____ hours and enjoys _____ hours of leisure.
A) 20; 60
B) 30; 50
C) 40; 40
D) 50; 30

Accepted Answer

The answer of Use the following to answer questions 
Figure:...

Question 15

To maximize utility, an individual should allocate time so that the marginal utility of the earnings from an hour spent working is equal to the marginal utility of an additional hour of leisure.

Accepted Answer

This is an application of the principle of diminishing marginal utility. As an individual works more, the marginal utility of each additional hour of work decreases, while the marginal utility of leisure time increases. Therefore, the individual should allocate time so that the marginal utility of the additional income earned from working is equal to the marginal utility of an additional hour of leisure. This will maximize overall utility.

Question 16

Use the following to answer questions 
Figure: Rita's Time Allocation Budget Line 
-(Figure: Rita's Time Allocation Budget Line) Look at the figure Rita's Time Allocation Budget Line. It is based on 80 hours available for labor and leisure. Her hourly wage is:
A) $5.60.
B) $7.00.
C) $8.00.
D) $10.00.

Accepted Answer

The answer of Use the following to answer questions 
Figure:...

Question 17

If an individual's wage rate decreases, the substitution effect will cause the individual to work fewer hours.

Accepted Answer

When wage rate decreases, the cost of leisure increases relative to the cost of work. As a result, the individual will substitute leisure for work and reduce the number of hours worked.

Question 18

Use the following to answer questions 
Figure: Rita's Time Allocation Budget Line 
-(Figure: Rita's Time Allocation Budget Line) Look at the figure Rita's Time Allocation Budget Line. It is based on 80 hours available for labor and leisure. Rita chooses 40 hours of leisure and income of $280. When her hourly wage doubles, Rita chooses 50 hours of leisure and income of $420. The substitution effect is making her work _____, the income effect is making her work _____, and the substitution effect is _____ than the income effect.
A) more; less; stronger
B) less; more; stronger
C) more; less; weaker
D) less; more; weaker

Accepted Answer

The substitution effect is the change in the quantity of labor supplied due to a change in the wage rate, holding the level of utility constant. The income effect is the change in quantity of labor supplied due to a change in income, holding the wage rate constant.

Looking at the figure, we can see that when Rita's hourly wage doubles, her budget line rotates outward making her able to purchase more combinations of leisure and income.

The substitution effect is making her work more, as the increase in hourly wage makes leisure more expensive relative to work, prompting her to work more hours.

On the other hand, the income effect is making her work less, as her increase in income makes leisure more affordable relative to work, prompting her to work fewer hours.

Since the substitution effect is offsetting the income effect, we know that Rita will still work more hours at the higher wage rate than she would have at the lower wage rate, but the increase in hours worked will be smaller than what it would have been with only the substitution effect. Therefore, the substitution effect is stronger than the income effect, and the best choice is C.

Question 19

Use the following to answer questions 
Figure: Joanna's Time Allocation Budget Line 
-(Figure: Joanna's Time Allocation Budget Line) The figure Joanna's Time Allocation Budget Line depicts what happens when she can choose how to spend 40 hours. If Joanna's wage increases and as a result she consumes LESS leisure, her supply curve of labor is:
A) horizontal.
B) upward-sloping.
C) downward-sloping.
D) vertical.

Accepted Answer

The answer of Use the following to answer questions 
Figure:...

Question 20

Kaile earns $10 as a lab technician. She can work up to 60 hours per week but usually works 35 hours. She spends several hours every week reading in the park. She says she likes this because it is free. Kaile is right: sitting in the park with a book is costless.

Accepted Answer

The answer of Kaile earns $10 as a lab technician....

Quiz 35: Indifference Curve Analysis of Labor Supply

Use the following to answer questions Figure: Income and Leisure Opportunities -(Figure: Income and Leisure Opportunities) Given Keisha's preferences and opportunities for income and leisure shown in the figure Income and Leisure Opportunities, Keisha sees leisure as:

While individual labor supply curves may bend backward, market labor supply curves are likely to be upward-sloping throughout, since higher wages induce new workers to enter the labor market.

Use the following to answer questions Figure: Joanna's Time Allocation Budget Line -(Figure: Joanna's Time Allocation Budget Line) The figure Joanna's Time Allocation Budget Line depicts what happens when she can choose how to spend 40 hours. What is Joanna's wage rate?

Use the following to answer questions Figure: Joanna's Time Allocation Budget Line -(Figure: Joanna's Time Allocation Budget Line) Joanna's Time Allocation Budget Line depicts what happens when she can choose how to spend 40 hours. If Joanna's wage rate increases and she ends up working MORE hours:

Alex's wage rate falls. Holding everything else constant, Alex's new time allocation budget line will:

Use the following to answer questions Figure: Joanna's Time Allocation Budget Line -(Figure: Joanna's Time Allocation Budget Line) The figure Joanna's Time Allocation Budget Line depicts what happens when she can choose how to spend 40 hours. What is the opportunity cost of an hour of leisure?

If leisure is a normal good for Randy, then both the substitution effect and the income effect of a decrease in the wage rate will cause Randy to work fewer hours.

Use the following to answer questions Figure: Rita's Time Allocation Budget Line -(Figure: Rita's Time Allocation Budget Line) Look at the figure Rita's Time Allocation Budget Line. It is based on 80 hours available for labor and leisure. If her hourly wage doubles, the vertical intercept will be:

To maximize utility, an individual should allocate time so that the marginal utility of the earnings from an hour spent working is equal to the marginal utility of an additional hour of leisure.

Use the following to answer questions Figure: Rita's Time Allocation Budget Line -(Figure: Rita's Time Allocation Budget Line) Look at the figure Rita's Time Allocation Budget Line. It is based on 80 hours available for labor and leisure. Her hourly wage is:

If an individual's wage rate decreases, the substitution effect will cause the individual to work fewer hours.

Kaile earns $10 as a lab technician. She can work up to 60 hours per week but usually works 35 hours. She spends several hours every week reading in the park. She says she likes this because it is free. Kaile is right: sitting in the park with a book is costless.