CHAPTER 2 The Theory of Individual Labor Supply

I. THE WORK LEIS!RE "ECISIO#$ %ASIC &O"EL A. Indifferen'e Curve( ). #e*a+ive Slope 2. Conve, +o Ori*in -. Indifferen'e &ap .. "ifferen+ Wor/ Lei(ure Preferen'e( %. %ud*e+ Con(+rain+ C. !+ili+y &a,i0i1a+ion ". Wa*e Ra+e Chan*e($ In'o0e and Sub(+i+u+ion Effe'+( ). In'o0e Effe'+ 2. Sub(+i+u+ion Effe'+ -. #e+ Effe'+ E. 2raphi' Por+rayal of In'o0e and Sub(+i+u+ion Effe'+( 3. Ra+ionale for %a'/4ard %endin* Supply Curve 2. E0piri'al Eviden'e H. Ela(+i'i+y ver(u( Chan*e( in Labor Supply APPL5I#2 A#" E6TE#"I#2 THE &O"EL A. #onpar+i'ipan+( and +he Re(erva+ion Wa*e %. S+andard Wor/day ). Overe0ploy0en+ 2. !ndere0ploy0en+ C. Pre0iu0 Pay ver(u( S+rai*h+ Ti0e ". In'o0e &ain+enan'e Pro*ra0( ). Three %a(i' 3ea+ure( a. The In'o0e 2uaran+ee or %a(i' %enefi+7 % b. The %enefi+ Redu'+ion Ra+e7 + '. The %rea/ Even Level of In'o0e7 5b 2. Illu(+ra+ion -. Con+rover(y .. The End of Welfare a( an En+i+le0en+

II.

WORL" O3 WORK ). Sleep Ti0e Lin/ed +o Earnin*( 2. The Carne*ie Con8e'+ure -. #e4 Over+i0e Rule( .. The Labor Supply I0pa'+ of +he Earned In'o0e Ta, Credi+ 2LO%AL PERSPECTI9E ). Annual Hour( of Wor/ per E0ployee

LEARNING OBJECTIVES Af+er learnin* +he 0a+erial in Chap+er 2 of Contemporary Labor Economics7 +he (+uden+ (hould be able +o$ ). 2. -. .. :. ;. <. >. ?. )@. )). )2. )-. ).. ):. );. )<. *raph an indifferen'e 0ap for a per(on 4ho value( lei(ure and in'o0e e,plain ho4 +he (lope of +he indifferen'e 'urve rela+e( +o +he 0ar*inal ra+e of (ub(+i+u+ion of lei(ure for in'o0e e,plain 4hy +here i( a di0ini(hin* 0ar*inal ra+e of (ub(+i+u+ion of lei(ure for in'o0e7 4hi'h re(ul+( in 'onve, indifferen'e 'urve( e,plain 4hy indifferen'e 'urve( far+her fro0 +he ori*in repre(en+ hi*her level( of u+ili+y rela+e per(onal differen'e( in 4or/ lei(ure preferen'e( +o per(onal differen'e( in +he (hape( of indifferen'e 'urve( *raph an in'o0e lei(ure bud*e+ 'on(+rain+ and e,plain ho4 i+( (lope rela+e( +o +he 4a*e ra+e iden+ify7 u(in* +he ba(i' in'o0e lei(ure 0odel7 an individual=( op+i0al 'o0bina+ion of in'o0e and lei(ure di(+in*ui(h be+4een +he in'o0e effe'+ and (ub(+i+u+ion effe'+ of a 4a*e 'han*e and i(ola+e ea'h on a *raph e,plain7 in +er0( of in'o0e and (ub(+i+u+ion effe'+(7 +he ra+ionale for a ba'/4ard bendin* labor (upply 'urve Corre'+ly define and 'al'ula+e +he 4a*e ela(+i'i+y of labor (upply e,plain 4hy a per(on 4i+h non labor in'o0e 0ay 'hoo(e no+ +o par+i'ipa+e in +he labor for'e7 rela+in* +hi( de'i(ion +o +he 'on'ep+ of +he re(erva+ion 4a*e e,plain 4hy a per(on 0ay 'hoo(e +o A0oonli*h+B or +o 4or/ par+ +i0e (ho4 in a *raph ho4 unpaid ab(en+eei(0 0ay be rela+ed +o reCuire0en+( +ha+ people 4or/ a (+andard .@ hour 4ee/ (ho4 *raphi'ally +ha+ a per(on=( u+ili+y 0a,i0i1in* nu0ber of 4or/ hour( 0ay in'rea(e in re(pon(e +o a pre0iu0 4a*e for over+i0e 4or/ e,a0ine an in'o0e 0ain+enan'e plan and de+er0ine +he ba(i' benefi+7 +he benefi+ redu'+ion ra+e7 and +he brea/ even level of in'o0e (ho47 u(in* +he in'o0e lei(ure 0odel7 4hy an in'o0e 0ain+enan'e plan 0ay redu'e in'en+ive( +o 4or/ Rela+e provi(ion( of +he Te0porary A((i(+an'e for #eedy 3a0ily pro*ra0 +o +he drop in 4elfare 'a(eload( over +he pa(+ )@ year(

ANSWERS TO SELECTED END-OF-CHAPTER QUESTIONS 2. .. Wor/ 0ore hour( in DaE and DbEF fe4er hour( in D'E and DdE. The ou+'o0e a((u0e( +he (ub(+i+u+ion effe'+ i( (+ron*er +han +he in'o0e effe'+. The (+a+e0en+ refle'+( e0piri'al eviden'e +ha+ +he (ub(+i+u+ion effe'+ (+ron*ly do0ina+e( +he in'o0e effe'+ for fe0ale(7 bu+ +he in'o0e effe'+ 4ea/ly do0ina+e( +he (ub(+i+u+ion effe'+ for 0ale(.

:. ;.

She 4ill 'hoo(e +he hi*h 4a*e op+ion. She 4ill feel undere0ployed7 bu+ +hi( op+ion 4ill allo4 her +o rea'h a hi*her indifferen'e 'urve Da hi*her level of u+ili+y.E The lu0p (u0 +a, redu'e( 4or/ effor+ +hrou*h a pure in'o0e effe'+F +he propor+ional +a, 0ay ei+her in'rea(e or redu'e 4or/ effor+ dependin* on +he rela+ive (+ren*+h( of +he oppo(in* in'o0e and (ub(+i+u+ion effe'+(. The (ub(idy i( G2.@@ DG-@@@ H .- , G2@@@E. The +o+al in'o0e i( G..@@ DG2@@@ I +he G2.@@ (ub(idy.E The brea/ even level of in'o0e i( G)@7@@@ DG-@@@ J .-@E. H%W= en+ail( a 1ero benefi+ redu'+ion ra+e and +he 4ea/e(+ di(in'en+ive( +o 4or/. In 'on+ra(+7 H%5W en+ail( a )@@K benefi+ redu'+ion ra+e and +he (+ron*e(+ di(in'en+ive( +o 4or/. An in'rea(e in +he 0ini0u0 4a*e 0ay ei+her in'rea(e or de'rea(e de(ired 4or/ hour( for +ho(e already in +he labor 0ar/e+ dependin* on +he rela+ive (+ren*+h( of +he (ub(+i+u+ion and in'o0e effe'+(. The (ub(+i+u+ion effe'+ of +he hi*her 4a*e 4ill in'rea(e de(ired hour( of 4or/ 4hile +he in'o0e effe'+ 4ill de'rea(e de(ired hour( of 4or/. A dire'+ *ran+ of nonlabor in'o0e ha( only an in'o0e effe'+7 redu'in* de(ired hour( of 4or/.

)). )2. ):.

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TUTORIAL2 THEORY OF INDIVIDUAL LABOR SUPPLY MULTIPLE CHOICE QUESTIONS ). In +he 'on+e,+ of +he ba(i' 4or/ lei(ure 0odel7 A4or/B i( defined a($ a. +i0e devo+ed +o a payin* 8ob or hou(ehold 4or/ b. +i0e devo+ed +o a payin* 8ob '. +i0e devo+ed +o any Aunde(irableB a'+ivi+y d. all +i0e no+ devo+ed +o re(+ and rela,a+ion In +he 'on+e,+ of +he ba(i' 4or/ lei(ure 0odel7 Alei(ureB +i0e in'lude($ a. only +i0e devo+ed +o re(+ and rela,a+ion b. any +i0e no+ devo+ed +o ei+her a payin* 8ob or hou(ehold 4or/ '. any +i0e devo+ed +o any+hin* de(irable d. any +i0e no+ devo+ed +o a payin* 8ob The (lope of an indifferen'e 'urve a+ any poin+ refle'+( +he$ a. ra+e a+ 4hi'h a per(on i( 4illin* +o (ub(+i+u+e lei(ure for in'o0e b. 4a*e ra+e '. in'o0e effe'+ d. (ub(+i+u+ion effe'+ Indifferen'e 'urve( are 'onve, +o +he ori*in be'au(e$ a. a+ a lo4er in'o0e7 a per(on i( 0ore 4illin* +o (a'rifi'e in'o0e for addi+ional lei(ure b. a+ a lo4er in'o0e7 a per(on i( le(( 4illin* +o (a'rifi'e in'o0e for addi+ional lei(ure '. a+ any in'o0e level7 a per(on i( 4illin* +o (a'rifi'e +he (a0e a0oun+ of in'o0e for addi+ional lei(ure d. +he 0ar*inal ra+e of (ub(+i+u+ion of lei(ure for in'o0e i( ne*a+ive The 'onve, (hape of a (+andard indifferen'e 'urve refle'+($ a. a di0ini(hin* 0ar*inal ra+e of (ub(+i+u+ion of lei(ure for in'o0e b. an in'rea(in* 0ar*inal ra+e of (ub(+i+u+ion of lei(ure for in'o0e '. a 'on(+an+ 0ar*inal ra+e of (ub(+i+u+ion of lei(ure for in'o0e d. +he 4a*e ra+e On an indifferen'e 0ap refle'+in* +he +radeoff be+4een in'o0e and lei(ure7 hi*her level( of u+ili+y are a'hieved by 0ovin*$ a. fro0 lef+ +o ri*h+ alon* a *iven indifferen'e 'urve b. fro0 ri*h+ +o lef+ alon* a *iven indifferen'e 'urve '. +o an indifferen'e 'urve fur+her fro0 +he ori*in d. +o an indifferen'e 'urve 'lo(er +o +he ori*in 3or in'o0e and lei(ure +i0e7 a hi*her level of u+ili+y i( a'hieved by 0ovin* +o +he LLLLL on an indifferen'e LLLLL. a. nor+hea(+F 'urve '. nor+hea(+F 0ap b. (ou+h4e(+F 'urve d. (ou+h4e(+F 0ap

2.

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Mue(+ion( > H )@ refer +o +he follo4in* dia*ra0 repre(en+in* Larry=( bud*e+ 'on(+rain+ and preferen'e($

In'o0e

A >. C

% Lei(ure

Con(ider +he +hree 'o0bina+ion( of lei(ure and in'o0e repre(en+ed by poin+( A7 %7 and C. Whi'h of +he follo4in* i( a 'orre'+ (+a+e0en+N a. Larry prefer( A +o % '. Larry prefer( % +o C b. Larry prefer( A +o C d. Larry prefer( C +o A ?. Whi'h of +he follo4in* i( a 'orre'+ (+a+e0en+N a. A+ A Larry=( 0ar*inal valua+ion of lei(ure i( hi*her +han +he 0ar/e+ 4a*e b. A+ % Larry=( 0ar*inal valua+ion of lei(ure i( hi*her +han +he 0ar/e+ 4a*e '. A+ C Larry=( 0ar*inal valua+ion of lei(ure i( lo4er +han +he 0ar/e+ 4a*e d. A+ % Larry value( lei(ure +he (a0e a0oun+ a( a+ A A+ poin+ A7 Larry=( 0ar*inal ra+e of (ub(+i+u+ion of lei(ure for in'o0e$

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)).

a. e,'eed( +he 4a*e and Larry 4ould li/e +o 4or/ 0ore hour( b. e,'eed( +he 4a*e and Larry 4ould li/e +o 4or/ fe4er hour( '. i( le(( +han +he 4a*e and Larry 4ould li/e +o 4or/ 0ore hour( d. e,'eed( +he 4a*e and Larry 4ould li/e +o 4or/ fe4er hour( On a (+andard in'o0e lei(ure dia*ra07 Sara ha( (+eeper indifferen'e 'urve( +han Oohn. Thi( li/ely refle'+( +he fa'+ +ha+$ a. Sara li/e( lei(ure bu+ di(li/e( in'o0e 4hile Oohn li/e( bo+h b. Sara li/e( in'o0e bu+ di(li/e( lei(ure 4hile Oohn li/e( bo+h '. Sara value( lei(ure 0ore hi*hly 'o0pared +o in'o0e +han Oohn doe( d. Oohn value( lei(ure 0ore hi*hly 'o0pared +o in'o0e +han Sara doe( The hi*her +he individual=( 4a*e ra+e$ a. +he (+eeper +he bud*e+ 'on(+rain+ b. +he lo4er +he 0ar*inal ra+e of (ub(+i+u+ion of lei(ure for in'o0e '. +he *rea+er +he de(ired nu0ber of hour( of 4or/ d. +he *rea+er +he de(ired nu0ber of hour( of lei(ure The (lope of a (+andard bud*e+ 'on(+rain+ refle'+($ a. a di0ini(hin* 0ar*inal ra+e of (ub(+i+u+ion of lei(ure for in'o0e b. an in'rea(in* 0ar*inal ra+e of (ub(+i+u+ion of lei(ure for in'o0e '. a 'on(+an+ 0ar*inal ra+e of (ub(+i+u+ion of lei(ure for in'o0e d. +he 4a*e ra+e In an in'o0e lei(ure dia*ra07 +he 4a*e ra+e i( *raphi'ally repre(en+ed by +he$ a. (lope of +he indifferen'e 'urve( b. 'urva+ure of +he indifferen'e 'urve( '. (lope of +he bud*e+ line d. +an*en'y of +he bud*e+ line 4i+h an indifferen'e 'urve The op+i0al 4or/ lei(ure po(i+ion i( a'hieved 4here$ a. +he &RS L,Y i( eCual +o +he 4a*e ra+e b. +he differen'e be+4een +he &RS L,Y and +he 4a*e i( *rea+e(+ '. +he 4a*e ra+e i( *rea+e(+ d. +he &RS L,Y i( *rea+e(+ An individual 4ho(e &RS L,Y e,'eed( +he 4a*e a+ her 'urren+ 'o0bina+ion of lei(ure and in'o0e 'ould in'rea(e u+ili+y by$ a. 4or/in* 0ore hour( '. in'rea(in* her in'o0e b. 4or/in* fe4er hour( d. none of +he aboveF her u+ili+y i( 0a,i0i1ed

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Mue(+ion( )< H 2@ refer +o +he follo4in* dia*ra0$ In'o0e G2.@

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Con(iderin* +he +4o bud*e+ line( in +he dia*ra07 if +he per(on=( op+i0al nu0ber of hour( 4or/ed i( (even hour(7 +hen +he 4a*e ra+e 0u(+ be$ a. G)@ '. G2.@ b. G)?2 d. 'anno+ be de+er0ined The per(on ha( non 4a*e in'o0e of$ a. G@ b. G)@ '. d. G)?2 G2.@

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If +hi( per(on=( 4a*e ra+e fall( a( illu(+ra+ed in +he dia*ra07 +hen$ a. +he (ub(+i+u+ion effe'+ i( (+ron*er +han +he in'o0e effe'+ b. +he in'o0e effe'+ i( (+ron*er +han +he (ub(+i+u+ion effe'+ '. +hi( per(on=( non 4a*e in'o0e 4ill fall a( 4ell d. +he (ub(+i+u+ion effe'+ 'au(e( de(ired 4or/ hour( +o in'rea(e The in'o0e effe'+ of +he illu(+ra+ed 4a*e de'rea(e 'au(e( +hi( individual +o 4or/$ a. one le(( hour '. +4o le(( hour( b. one 0ore hour d. +4o 0ore hour( The in'o0e effe'+ i($ a. +he 'o0bina+ion of lei(ure and 4a*e ra+e +ha+ 0a,i0i1e( one=( in'o0e b. +ha+ par+ of +he +o+al 'han*e in de(ired 4or/ hour( +ha+ i( due +o +he 'han*e in real in'o0e re(ul+in* fro0 a 'han*e in +he 4a*e ra+e '. +ha+ par+ of +he +o+al 'han*e in de(ired 4or/ hour( +ha+ i( due +o a 'han*e in +he 4a*e ra+e7 4i+h real in'o0e or u+ili+y 'on(+an+ d. al4ay( do0ina+ed by +he (ub(+i+u+ion effe'+ The (ub(+i+u+ion effe'+ i($ a. +he 'o0bina+ion of lei(ure and 4a*e ra+e +ha+ 0a,i0i1e( one=( in'o0e b. +ha+ par+ of +he +o+al 'han*e in de(ired 4or/ hour( +ha+ i( due +o +he 'han*e in real in'o0e re(ul+in* fro0 a 'han*e in +he 4a*e ra+e '. +ha+ par+ of +he +o+al 'han*e in de(ired 4or/ hour( +ha+ i( due +o a 'han*e in +he 4a*e ra+e7 4i+h real in'o0e or u+ili+y 'on(+an+ d. al4ay( do0ina+ed by +he in'o0e effe'+ An in'rea(e in +he 4a*e ra+e 4ill in'rea(e de(ired hour( of 4or/ if$ a. +he in'o0e effe'+ and (ub(+i+u+ion effe'+ 'an'el one ano+her b. +he in'o0e effe'+ do0ina+e( +he (ub(+i+u+ion effe'+ '. +he (ub(+i+u+ion effe'+ do0ina+e( +he in'o0e effe'+ d. a''o0panied by an in'rea(e in non4a*e in'o0e Whi'h one of +he follo4in* 4ould be 0o(+ li/ely +o (hif+ +he labor (upply 'urve +o +he ri*h+N a. A de'rea(e in +he 4a*e ra+e b. A 'han*e in +he indifferen'e 0ap follo4in* de+eriora+ion of 4or/in* 'ondi+ion( '. A 'han*e in +he indifferen'e 0ap follo4in* an i0prove0en+ in 4or/in* 'ondi+ion( d. A (i*nifi'an+ in'rea(e in dividend and in+ere(+ in'o0e

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Con(ider +he i0pa'+ of a *eneral in'rea(e in real 4a*e(. E0piri'al eviden'e (u**e(+( +ha+ 0en 4ill +end +o 4or/ LLLLL hour( and 4o0en 4ill +end +o 4or/ LLLLL hour(. a. 0oreF fe4er '. fe4erF fe4er b. 0oreF 0ore d. fe4erF 0ore Whi'h of +he follo4in* 4ould una0bi*uou(ly predi'+ a de'rea(e in de(ired hour( of 4or/N a. The (ub(+i+u+ion effe'+ of a 4a*e de'rea(e b. The in'o0e effe'+ of a 4a*e de'rea(e '. A 4a*e in'rea(e d. The (ub(+i+u+ion effe'+ of a de'line in in'o0e +a, ra+e(

2;.

Mue(+ion( 2< H 2? are ba(ed on +he follo4in* dia*ra07 4hi'h (ho4( a labor (upply 'urve for an individual. Wa*e ra+e

SL WW2 W)

2<.

If +he 4a*e ri(e( fro0 W) +o W2 4e 0ay 'on'lude +ha+$ a. +he in'o0e effe'+ i( (+ron*er +han effe'+ H) HH2 +he (ub(+i+u+ion Hour( of Wor/ b. +he in'o0e effe'+ and (ub(+i+u+ion effe'+( are eCual '. +he (ub(+i+u+ion effe'+ i( (+ron*er +han +he in'o0e effe'+ d. labor (upply i( perfe'+ly inela(+i' If +hi( per(on 4ere no4 4illin* +o (upply only H) hour( of 4or/ a+ W-7 4e 'ould 'on'lude +ha+$ a. labor (upply in'rea(ed D+he 'urve (hif+ed +o +he ri*h+E b. labor (upply de'rea(ed D+he 'urve (hif+ed +o +he lef+E '. +he per(on=( preferen'e( 0u(+ have 'han*ed d. +he (ub(+i+u+ion and in'o0e effe'+( are no4 eCual Of +he follo4in*7 4hi'h one 4ould 0o(+ li/ely 'au(e +hi( per(on +o (upply H) hour( of 4or/ a+ W- ra+her +han +he 'urren+ H- hour(N a. Thi( per(on=( (pou(e re'eive( a (ub(+an+ial in'o0e in'rea(e )2

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b. '. d. -@.

A de'rea(e in +hi( per(on=( 0ar*inal valua+ion of lei(ure +i0e Con*re(( aboli(he( an in'o0e 0ain+enan'e pro*ra0 Thi( per(on=( (pou(e (uffer( a (ub(+an+ial 'u+ in in'o0e

Suppo(e an individual 4or/er i( on +he ba'/4ard bendin* por+ion of her labor (upply 'urve. Then for a 4a*e in'rea(e +he$ a. in'o0e and (ub(+i+u+ion effe'+( bo+h in'rea(e de(ired 4or/ hour( b. in'o0e and (ub(+i+u+ion effe'+( are eCual ' in'o0e effe'+ i( (+ron*er +han +he (ub(+i+u+ion effe'+ d. (ub(+i+u+ion effe'+ i( (+ron*er +han +he in'o0e effe'+

Mue(+ion( -) H -: are ba(ed on +he follo4in* dia*ra0$ In'o0e %)

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Lei(ure

If +he 'urren+ 4a*e ra+e re(ul+( in a bud*e+ 'on(+rain+ of A% )7 +he individual 4ill 'hoo(e$ a. @C hour( of 4or/ and AC hour( of lei(ure b. A" hour( of 4or/ and @" hour( of lei(ure '. @" hour( of 4or/ and A" hour( of lei(ure d. AC hour( of 4or/ and @C hour( of lei(ure The (hif+ fro0 bud*e+ line A%) +o A%2 i0plie( a$ a. de'rea(e in +he 4a*e ra+e '. b. de'rea(e in non 4a*e in'o0e d. in'rea(e in +he 4a*e ra+e in'rea(e in non 4a*e in'o0e

-2.

--.

The eCuilibriu0 po(i+ion( (ho4n i0ply +ha+ in +he relevan+ 4a*e ran*e +hi( per(on i($ a. on +he up(lopin* (e*0en+ of +he individual labor (upply 'urve b. on +he ba'/4ard bendin* (e*0en+ of +he individual labor (upply 'urve

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a+ +he poin+ on +he individual labor (upply 'urve 4here +he in'o0e and (ub(+i+u+ion effe'+( are eCual bein* offered a 4a*e le(( +han +he re(erva+ion 4a*e

The eCuilibriu0 po(i+ion( (ho4n in +he dia*ra0 i0ply +ha+ for a 4a*e in'rea(e$ a. bo+h +he in'o0e and (ub(+i+u+ion effe'+( in'rea(e de(ired 4or/ hour( b. bo+h +he in'o0e and (ub(+i+u+ion effe'+( redu'e de(ired 4or/ hour( '. +he in'o0e effe'+ in'rea(e( de(ired 4or/ hour( and +he (ub(+i+u+ion effe'+ redu'e( de(ired 4or/ hour( d. +he in'o0e effe'+ redu'e( de(ired 4or/ hour( and +he (ub(+i+u+ion effe'+ in'rea(e( de(ired 4or/ hour( In +he dia*ra07 +he (ub(+i+u+ion effe'+ a((o'ia+ed 4i+h a 4a*e in'rea(e i( (ho4n by +he di(+an'e$ a. C" b. "E '. CE d. @C Suppo(e an individual 4or/er i( on +he up(lopin* por+ion of her labor (upply 'urve. Then for a 4a*e in'rea(e +he$ a. in'o0e and (ub(+i+u+ion effe'+( bo+h in'rea(e de(ired 4or/ hour( b. in'o0e and (ub(+i+u+ion effe'+( are eCual '. in'o0e effe'+ do0ina+e( +he (ub(+i+u+ion effe'+ d (ub(+i+u+ion effe'+ do0ina+e( +he in'o0e effe'+ A )@K in'rea(e in +he 4a*e indu'e( &ar*y +o in'rea(e her de(ired of 4or/ hour( by 2K. Over +hi( ran*e of 4a*e(7 &ar*y=( 4a*e ela(+i'i+y of labor (upply i($ a. ela(+i' '. inela(+i' b. uni+ ela(+i' d. ne*a+ive 3or Oenny7 +he in'o0e effe'+ of a 4a*e in'rea(e do0ina+e( +he (ub(+i+u+ion effe'+. Oenny=( 4a*e ela(+i'i+y of labor (upply i($ a. ela(+i' '. inela(+i' b. uni+ ela(+i' d. ne*a+ive Whi'h of +he follo4in* 'ir'u0(+an'e( 4ill in'rea(e +he li/elihood of an individual bein* a non par+i'ipan+ in +he labor 0ar/e+N a. Hi*h earnin*( 'apa'i+y in +he labor 0ar/e+ b. The ab(en'e of non 4a*e in'o0e '. A po+en+ial 0ar/e+ 4a*e +ha+ e,'eed( +he individual=( re(erva+ion 4a*e d Availabili+y of (ub(+an+ial non 4a*e in'o0e S+even=( re(erva+ion 4a*e i( G)2 and hi( 0ar/e+ 4a*e i( G)). We 'an 'on'lude +ha+$ a. S+even=( 0ar*inal ra+e of (ub(+i+u+ion of lei(ure for in'o0e i( le(( +han hi( re(erva+ion 4a*e b. S+even 4ill be a nonpar+i'ipan+ in +he labor 0ar/e+ '. S+even=( (ub8e'+ive valua+ion of non0ar/e+ +i0e i( le(( +han +he value of 4or/ d. S+even ha( no non4a*e (our'e( of in'o0e Shani+a i( reCuired by her e0ployer +o 4or/ a (+andard ei*h+ hour 4or/day. Suppo(e her 0ar*inal ra+e of (ub(+i+u+ion of lei(ure for in'o0e i( le(( +han +he 4a*e ra+e a+ +hi( level of 4or/ effor+. We 'an 'on'lude +ha+ Shani+a 4ill$ a feel undere0ployed b. probably have a hi*her +han avera*e ab(en+eei(0 ra+e '. feel overe0ployed ).

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Sa00y i( reCuired by her e0ployer +o 4or/ a (+andard ei*h+ hour 4or/day. Suppo(e her 0ar*inal ra+e of (ub(+i+u+ion of lei(ure for in'o0e e,'eed( +he 4a*e ra+e a+ +hi( level of 4or/ effor+. We 'an 'on'lude +ha+ Sa00y 4ill$ a feel undere0ployed b. de(ire +o find a (e'ond 8ob '. feel overe0ployed d. de(ire +o 4or/ volun+ary over+i0e

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Co0pared +o 4or/er( 4i+h le(( edu'a+ion7 people 4ho have 0ore edu'a+ion +end +o earn hi*her 4a*e( and have hi*her pen(ion( upon re+ire0en+. 2iven +hi( ob(erva+ion7 4hi'h of +he follo4in* (+a+e0en+( be(+ e,plain( 4hy +ho(e per(on( 4i+h 0ore edu'a+ion al(o re+ire a+ a la+er a*eN a. If +a(+e( for lei(ure are +he (a0e7 +he effe'+ of +he hi*her pen(ion 0u(+ ou+4ei*h +he effe'+( of +he hi*her 4a*e( b If +a(+e( for lei(ure are +he (a0e7 +he effe'+( of +he hi*her 4a*e( 0u(+ ou+4ei*h +he effe'+( of +he hi*her pen(ion( '. Sin'e hi*her 4a*e( and pen(ion( bo+h (u**e(+ a lo4er re+ire0en+ a*e7 +ho(e 4i+h 0ore edu'a+ion 0u(+ value lei(ure le(( d. Re*ardle(( of +he +a(+e( for lei(ure7 +he hi*her 4a*e( and pen(ion( 4ould bo+h (u**e(+ a hi*her re+ire0en+ a*e Mue(+ion( .. and .: are ba(ed on +he follo4in* dia*ra0. TS repre(en+( +he (+andard .@ hour 4or/4ee/. Indifferen'e 'urve( labeled 4i+h (ub('rip+( AaB and AbB are for individual( A and %7 re(pe'+ively. In'o0e

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Ia ... Lei(ure @ T all7 4or/er A((u0in* 4or/er( 0u(+ 4or/ S TS hour( or no+ a+ A 4ill$ a no+ par+i'ipa+e in +he labor for'e b. be a+ an op+i0u0 a+ TS hour( of 4or/ '. 4or/ +he (+andard 4or/4ee/ bu+ 4ill feel overe0ployed d. 4or/ +he (+andard 4or/4ee/ bu+ 4ill feel undere0ployed A((u0in* 4or/er( 0u(+ 4or/ TS hour( or no+ a+ all7 4or/er % 4ill$ a. no+ par+i'ipa+e in +he labor for'e b. be a+ an op+i0u0 a+ TS hour( of 4or/ '. 4or/ +he (+andard 4or/4ee/ bu+ 4ill feel overe0ployed d 4or/ +he (+andard 4or/4ee/ bu+ 4ill feel undere0ployed

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Wor/ Suppo(e +hi( 4or/er i( 'urren+ly 4or/in* .@ hour( 4ee/ and earnin* G> per hour. Whi'h one ;@ .@ @ per of +he follo4in* 4ould 'au(e a 0ove +o poin+ %7 and +he (ub(eCuen+ in'rea(e in 4or/ hour( +o ;@N a The availabili+y of over+i0e 4or/ a+ G)2 per hour b. The availabili+y of a 0oonli*h+in* 8ob +ha+ pay( G; per hour '. An in'rea(e in +he (+rai*h+ +i0e 4a*e +o G?.-- per hour d. An in'rea(e in non 4a*e in'o0e of G2.@ Suppo(e +hi( 4or/er=( union ne*o+ia+e( an in'rea(e in +he (+rai*h+ +i0e 4a*e fro0 G> +o G?.-- per hour 4i+h no bonu( for over+i0e. Thi( plan 4ould allo4 earnin*( of G:;@ a+ ;@ hour( per 4ee/. A((u0in* +hi( 4or/er 'an freely 'hoo(e +he nu0ber of hour( 4or/ed7 he 4ill 'hoo(e +o 4or/$ a. ;@ hour( per 4ee/ b fe4er +han ;@ hour( per 4ee/ '. 0ore +han ;@ hour( per 4ee/ d. 0ore +han ;@ hour( per 4ee/ if +he in'o0e effe'+ do0ina+e(F le(( o+her4i(e Suppo(e a 4or/in* 0o+her i( 'urren+ly ineli*ible for any *overn0en+ a((i(+an'e. If (he 4ere +hen +o be'o0e eli*ible for an in'o0e 0ain+enan'e pro*ra0 +ha+ in'orpora+e( bo+h a ba(i' benefi+ and a po(i+ive benefi+ redu'+ion ra+e$ a. bo+h +he in'o0e and (ub(+i+u+ion effe'+ 4ill 'au(e her +o in'rea(e her 4or/ effor+ b. bo+h +he in'o0e and (ub(+i+u+ion effe'+ 4ill 'au(e her +o de'rea(e her 4or/ effor+ '. her 4or/ effor+ 4ill in'rea(e if +he (ub(+i+u+ion effe'+ i( (+ron*er +han +he in'o0e effe'+ d. her 4or/ effor+ 4ill de'rea(e if +he (ub(+i+u+ion effe'+ i( (+ron*er +han +he in'o0e effe'+

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Suppo(e an in'o0e 0ain+enan'e pro*ra0 offer( a ba(i' benefi+ of G<:@@ per year and +he benefi+ redu'+ion ra+e i( -- )J-K. The brea/ even level of in'o0e i( +hen$ a. G2:@@ b. G<:@@ '. G):7@@@ d. G227:@@ The Per(onal Re(pon(ibili+y and Wor/ Oppor+uni+y A'+ of )??;$

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0oved 'on+rol over 4elfare (pendin* fro0 (+a+e( +o +he federal *overn0en+ re0oved life+i0e li0i+( on 4elfare eli*ibili+y 4i+h fe4 e,'ep+ion(7 reCuire( 4elfare re'ipien+( +o 4or/ af+er +4o year( of re'eivin* a((i(+an'e provided i00edia+e 4elfare benefi+( +o Cualified i00i*ran+(

In +he year( follo4in* ena'+0en+ of 4elfare refor0 in )??;7 4elfare 'a(e load($ a. dropped (li*h+ly '. dropped by 0ore +han :@K b. in'rea(ed (li*h+ly d. in'rea(ed by al0o(+ :@K DWorld of Work 2 )E A (+udy by %iddle and Ha0er0e(h found +ha+ in'rea(in* 4a*e($ a. redu'ed (leep +i0e for 0en bu+ no+ for 4o0en b. 'au(ed bo+h 0en and 4o0en +o (ub(+i+u+e A4a/in* lei(ureB for (leep +i0e '. had no i0pa'+ on (leep +i0e d. redu'ed (leep +i0e for 4o0en bu+ no+ for 0en DWorld of Work 2 2E E0piri'al eviden'e indi'a+e( +ha+ inheri+an'e( LLLLL labor for'e par+i'ipa+ionF fur+her7 per(on( re'eivin* inheri+an'e( +end +o be LLLLL li/ely +o 4or/ in +he year( pre'edin* +he inheri+an'e. a. have no i0pa'+ onF le(( '. redu'eF eCually b. redu'eF 0ore d. redu'eF le(( DWorld of Work 2 -E Whi'h one of +he follo4in* individual( 0i*h+ be e,e0p+ fro0 +he ne4 over+i0e pay re*ula+ion(N a. Kevin hold( an ad0ini(+ra+ive po(+ b. &ar'ie i( paid by +he hour '. Ada0 re'eive( a rela+ively lo4 4a*e d. "evan+e i( paid a (alary of G.@@ per 4ee/ DWorld of Work 2-4) The Earned In'o0e Ta, Credi+$ a. redu'e( de(ired hour( of 4or/ for +ho(e already in +he labor for'e b. in'rea(e( +he labor for'e par+i'ipa+ion ra+e '. al4ay( in'rea(e( 4i+h in'rea(e( in earnin*( d. i( pha(ed ou+ a( +he nu0ber of 'hildren in'rea(e(

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