Question 1

Suppose a person's utility for leisure (L)and consumption (Y)can be expressed as U = Y + L^0.5.Show what happens to the person's labor supply curve when the income tax is cut from 70 percent to 30 percent.Denote hours worked as H and wage per hour as w.

Accepted Answer

The answer of Suppose a person's utility for leisure (L)and...

Question 2

Suppose a person's utility for leisure (L)and consumption (Y)can be expressed as U = Y ∗ L and this person has no non-labor income.Assuming a wage rate of $10 per hour,show what happens to the person's labor supply when the person wins a lottery prize of $100 per day.

Accepted Answer

The answer of Suppose a person's utility for leisure (L)and...

Question 3

Recent data has shown that income and volunteer time are positively related.Assuming that volunteer time is included in leisure time,what could explain this observation?
A) Higher income individuals view leisure as a normal good such that the income effect dominates the substitution effect.
B) Higher income individuals view leisure as a normal good such that the substitution effect dominates the income effect.
C) Higher income individuals view leisure as an inferior good such that the income and substitution effects both increase leisure time.
D) Both A and C.

Accepted Answer

When income increases, individuals tend to view leisure time as a normal good, meaning they will consume more of it as they have more income available. This dominates the substitution effect, which would suggest that as the price of leisure (in terms of hourly wage) decreases due to an increase in income, individuals would substitute leisure for work. Thus, the positive relationship between income and volunteer time is likely due to higher income individuals having more leisure time available to volunteer.

Question 4

Wealthy people will tend to have vertical labor supply curves
A) only if their income effect just offsets their substitution effect.
B) only if their income effect is greater than their substitution effect.
C) only if their income effect is less than their substitution effect.
D) only if they don't have an income effect.

Accepted Answer

The answer of Wealthy people will tend to have vertical...

Question 5

Suppose a person's utility for leisure (L)and consumption (Y)can be expressed as U = Y + L^0.5.Assuming a wage rate of $10 per hour,show what happens to the person's labor supply curve when the person wins a lottery prize of $100 per day.

Accepted Answer

The answer of Suppose a person's utility for leisure (L)and...

Question 6

An increase in unearned income always creates a disincentive to work.

Accepted Answer

The effect on labor supply will also depend on the individual's preferences towards work (leisure).

Question 7

Draw a graph with Goods Per Day on the vertical axis and Leisure Hours Per Day increasing from left to right on the horizontal axis.Show that a person who works can work fewer hours and increase utility when the wage rate increases.

Accepted Answer

The answer of Draw a graph with Goods Per Day...

Question 8

A tax cut will unambiguously lower income-tax revenue.

Accepted Answer

It depends on how the quantity of labor supplied responds to the increase in the after-tax wage rate.If the income effect dominates,the quantity of labor supplied falls and so will tax revenue.If the substitution effect dominates,the quantity of labor supplied increases,and income-tax revenue could increase.This is a function of whether the after-tax wage was low already because the tax rate was relatively high.

Quiz 5: Applying Consumer Theory

Suppose a person's utility for leisure (L)and consumption (Y)can be expressed as U = Y + L0.5.Show what happens to the person's labor supply curve when the income tax is cut from 70 percent to 30 percent.Denote hours worked as H and wage per hour as w.

Suppose a person's utility for leisure (L)and consumption (Y)can be expressed as U = Y ∗ L and this person has no non-labor income.Assuming a wage rate of $10 per hour,show what happens to the person's labor supply when the person wins a lottery prize of $100 per day.

Recent data has shown that income and volunteer time are positively related.Assuming that volunteer time is included in leisure time,what could explain this observation?

Wealthy people will tend to have vertical labor supply curves

Suppose a person's utility for leisure (L)and consumption (Y)can be expressed as U = Y + L0.5.Assuming a wage rate of $10 per hour,show what happens to the person's labor supply curve when the person wins a lottery prize of $100 per day.

An increase in unearned income always creates a disincentive to work.

Draw a graph with Goods Per Day on the vertical axis and Leisure Hours Per Day increasing from left to right on the horizontal axis.Show that a person who works can work fewer hours and increase utility when the wage rate increases.

A tax cut will unambiguously lower income-tax revenue.

Suppose a person's utility for leisure (L)and consumption (Y)can be expressed as U = Y + L^0.5.Show what happens to the person's labor supply curve when the income tax is cut from 70 percent to 30 percent.Denote hours worked as H and wage per hour as w.

Suppose a person's utility for leisure (L)and consumption (Y)can be expressed as U = Y + L^0.5.Assuming a wage rate of $10 per hour,show what happens to the person's labor supply curve when the person wins a lottery prize of $100 per day.