Scribd
Upload
34 views2 pages

Solutions Problem Set 4

The document contains answers to questions about labor supply and labor force participation decisions. It discusses how the substitution effect dominates the income effect for those not currently working. It also explains how increased opportunities for women in paid employment and technological advances that reduced household productivity impacted women's labor supply decisions. The final question discusses how a spouse's wage increase could impact a married woman's labor supply through income and substitution effects, and that their decisions may be made jointly depending on household productivity.

Uploaded by

Oona Niall
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
34 views2 pages

Solutions Problem Set 4

The document contains answers to questions about labor supply and labor force participation decisions. It discusses how the substitution effect dominates the income effect for those not currently working. It also explains how increased opportunities for women in paid employment and technological advances that reduced household productivity impacted women's labor supply decisions. The final question discusses how a spouse's wage increase could impact a married woman's labor supply through income and substitution effects, and that their decisions may be made jointly depending on household productivity.

Uploaded by

Oona Niall
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

Solutions 4.

Labor Supply in the Economy

Question 1 Answer:
This quotation is correct, because for labor force participation decisions, the substitution effect dominates
the income effect. The strength of the income effect is relatively weaker when the initial hours of work are
smaller. When initial hours of work are zero—as is the case when a person is out of the labor force—then
the income effect is zero if leisure is a normal good (increased resources cannot induce one to increase the
consumption of leisure, since leisure hours are already at their maximum).

Question 2 Answer:
One of the central aspects of the household production model of labor supply is the importance of the
relative productivity in paid employment as compared to household production. Increased opportunities in
the clerical and professional sectors, as well as increased educational levels, serve to increase productivity
in paid employment (that is, to increase the wage rate that women can command). Declining fertility rates
tend to reduce the productivity of hours spent at home, while the invention of labor-saving devices in
household production make it easier to substitute goods purchased with cash for time at home; both of
these factors flatten the household utility isoquants (an hour of household productivity forgone can be
replaced more readily by goods purchased with money). Increased urbanization also tended to make it
easier to substitute goods for household production. All these factors tended to raise market productivity
relative to household productivity, and some of them served to increase the strength of the substitution
effect relative to the income effect.

Question 3 Answer:
Ignoring the question of joint labor supply decisions, if a married woman’s husband gets a raise, that raise
(to her) has an income effect. This increased income without a corresponding increase in her wage rate tends
to induce her to work fewer hours. However, if her wage rate rises, she will experience both an income
and a substitution effect, and if she already works, theory cannot predict which one is dominant. If she is
out of the labor force, a wage increase will increase her chances of labor force participation.
Spouses however may make their labor supply decisions jointly. For example, if the husband’s wage
increase caused him to work more, the wife may also decide to work more if they are complements in
household production (or consumption). Thus, the answer to this question really depends upon whether one
assumes the two spouses have household productivities that are interdependent; if so, they must make their
labor supply decisions jointly.

Problem 1 Answer:
When the new bridge opened, Nina’s budget constraint shifted to the right in a parallel fashion as the
amount of available time for either work or leisure (as opposed to commuting) was increased. This shift in
her constraint created an income effect (she can now work more and consume more leisure). Because both
income and leisure are normal goods, both would increase. The only way income can increase in this case
is for her to work more, so we must conclude that her extra hour per day from the shorter commute is
divided in some way between more work and more leisure. Therefore, she works more.

Problem 2 Answer:
Problem 3 Answer:

Stella’s earnings are equal to the following:


[Number of hours (within first 8 hours)  $8]  [Number of hours (among next 8 hours)  $12]
The budget constraint for the first 8 hours of work is the segment to the right of the dotted vertical
line at 8 hours. The budget constraint for subsequent hours of work is the segment to the left of the
dotted vertical line at 8 hours.

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy