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Social Science Clinic => Economics => Topic started by: kms5229 on Nov 23, 2022

Title: Wages and Labor SupplyCurrently, Gunnar works 30 hours a week and earns $50 per hour. Next week his ...
Post by: kms5229 on Nov 23, 2022

Wages and Labor Supply

Currently, Gunnar works 30 hours a week and earns $50 per hour. Next week his wage will increase to $75 per hour and Gunnar will work 20 hours a week. Gunnar's change in labor supply illustrates the ________ (substitution/income) effect because after the wage increase, he devotes ________ (more/less) time to leisure.
◦ income, more
◦ income, less
◦ substitution, less
◦ substitution, more

Title: Wages and Labor SupplyCurrently, Gunnar works 30 hours a week and earns $50 per hour. Next week his ...
Post by: ellie on Nov 23, 2022

income, more

Remember, income = Hours worked*Wage per hour

Currently, Gunnar earns = 30*50 = $1500 a week.

Next week, Gunnar earns = 20*75 = $1500 a week.

Because earnings for both week are equivalent, this shows the income effect, an increase in the wage will increase a consumer's purchasing power for any given number of hours worked, which causes a worker to devote less time to working and more time to leisure.