Because leisure is a normal good an increase in the wage...

Name: because leisure is a normal good an increase in the wage rate will result in an increase in the quantity of labor supplied because of both the substitution effect and the income effect 05692
Uploaded: 2022-07-17T16:02:16-08:00
Duration: 3 min 2 s
Channel: Azat Nurmukhametov
Description: because leisure is a normal good an increase in the wage rate will result in an increase in the quantity of labor supplied because of both the substitution effect and the income effect 05692

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Azat N.

Suppose that the owner of Boyer Construction is feeling the pinch of increased premiums associated with worker's compensation and has decided to cut the wages of its two employees (Albert and Sid) from $25 per hour to $22 per hour. Assume that Albert and Sid view income and leisure as "goods," that both experience a diminishing rate of marginal substitution between income and leisure, and that the workers have the same before- and after-tax budget constraints at each wage. Draw each worker's opportunity set for each hourly wage. At the wage of $25 per hour, both Albert and Sid are observed to consume 12 hours of leisure (and, equivalently, supply 12 hours of labor). After wages were cut to $22, Albert consumes 10 hours of leisure and Sid consumes 14 hours of leisure. Determine the number of hours of labor each worker supplies at a wage of $22 per hour. How can you explain the seemingly contradictory result that the workers supply a different number of labor hours?

Andrew D.

In many European countries high minimum wages have led to high levels of unemployment and underemployment, and a two-tier labor system. In the formal labor market, workers have good jobs that pay at least the minimum wage. In the informal, or black market for labor, workers have poor jobs and receive less than the minimum wage. a. Draw a demand and supply diagram showing the effect of the imposition of a minimum wage on the overall market for labor, with wage on the vertical axis and hours of labor on the horizontal axis. Your supply curve should represent the hours of labor offered by workers according to the wage, and the demand curve represents the hours of labor demanded by employers according to the wage. On your diagram show the deadweight loss from the imposition of a minimum wage. What type of shortage is created? Illustrate on your diagram the size of the shortage. b. Assume that the imposition of the high minimum wage causes a contraction in the economy so that employers in the formal sector cut their production and their demand for workers. Illustrate the effect of this on the overall market for labor. What happens to the size of the deadweight loss? The shortage? Illustrate with a diagram. c. Assume that the workers who cannot get a job paying at least the minimum wage move into the informal labor market where there is no minimum wage. What happens to the size of the informal market for labor as a result of the economic contraction? What happens to the equilibrium wage in the informal labor market? Illustrate with a supply and demand diagram for the informal market. Solution a. The shortage created is a shortage of jobs: at the minimum wage there are more job-seekers than there are jobs available. b. The contraction in the economy causes the demand for labor to fall, shifting the demand curve leftwards from $\mathrm{D}$ to its new position at $\mathrm{D}^{\prime}$. Both the deadweight loss and the shortage of jobs caused by the minimum wage increase as a result of the fall in the demand for labor. c. As a result of the economic contraction which reduces the demand for workers in the overall market, workers move to the informal labor market. This increases the supply of labor in the informal labor market. The supply curve for labor shifts rightwards from $S$ to its new position at $S^{\prime}$. The equilibrium wage in the informal labor market falls from $w^{*}$ to $w^{* *}$ and the quantity of hours transacted increases from $Q^{*}$ to $Q^{* *}$, as the informal labor market expands.Solution a. The shortage created is a shortage of jobs: at the minimum wage there are more job-seekers than there are jobs available. b. The contraction in the economy causes the demand for labor to fall, shifting the demand curve leftwards from $\mathrm{D}$ to its new position at $\mathrm{D}$ '. Both the deadweight loss and the shortage of jobs caused by the minimum wage increase as a result of the fall in the demand for labor. c. As a result of the economic contraction which reduces the demand for workers in the overall market, workers move to the informal labor market. This increases the supply of labor in the informal labor market. The supply curve for labor shifts rightwards from $S$ to its new position at $S^{\prime}$. The equilibrium wage in the informal labor market falls from $w^{*}$ to $w^{* *}$ and the quantity of hours transacted increases from $Q^{*}$ to $Q^{* *}$, as the informal labor market expands.

Transcript

0:00 Hello.

00:02 This question is about the income effect and we know that the income effect measures how people's choices change when they have more income.

00:14 For most people leisure is a normal good.

00:20 So a rise in income means an increase in the marginal benefits of leisure.

00:28 Thus a higher wage which boost workers ' incomes will lead them to choose more leisure, which means working fewer hours.

00:42 And oppositely, if wages decline, this means that they will demand less leisure.

00:55 So as we can see, the correct answer is b.

01:02 Because as wages rise the income effect dictates that the quantity of leisure demanded increases.

01:12 So leisure is a normal good, it's not an inferior good.

01:23 This means when wage rises, the quantity of leisure demanded demanded will also increase...

Question

Because leisure is a normal good, an increase in the wage rate will result in an increase in the quantity of labor supplied because of both the substitution effect and the income effect.

Question

Because leisure is a normal good, an increase in the wage rate will result in an increase in the quantity of labor supplied because of both the substitution effect and the income effect.

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