Answer to Question #331200 in Economics for Group assignment

Question

Indicate in each of the following instances whether specified events would cause a worker to want to work more or fewer hours

a) The wage rate rises and the substitution effect is greater than the income effect

b) The wage rate falls and the income effect is greater then than substitution effect.

Answer 1

2. a.). When the wage rates rise and the substitution effect is greater than the income effect, a worker will tend to work for more hours. The substitution effect of higher wages means a worker will give up leisure to do more hours of work since work has now a higher reward.

b.). When the wage rate falls and the income effect is greater than the substitution effect, the worker will tend to work for more hours. This is because the income effect of lower wages means that the worker is poorer and, therefore, will purchase less leisure and thus hours of work will increase.