Arlene quits her 125,000-a-year job to take care of her ailing ...

[nautica902]

Arlene quits her 125,000-a-year job to take care of her ailing parents. What is the opportunity cost of her decision?
 
  A) at least 125,000
  B) It depends on the going rate for home-care providers.
  C) the value she attributes to the satisfaction she receives from taking care of her parents
  D) zero, since she will no longer be earning a salary

Question 2

Using the concept of income and substitution effects, explain how you might react to each of the following:
 
  (a) You currently work 20 hours a week at 10 per hour and your employer tells you he must reduce your wage to 8 per hour.
  (b) The price of pizza doubles and the price of hamburgers remains constant.

[yotaSR5]

Answer to Question 1

A

Answer to Question 2

(a) A reduction in the wage rate could either cause hours worked to increase or decrease, depending on whether the income or substitution effect is stronger.
(b) If the price of pizza doubles, the consumer's real income decreases, so the consumer would eat less pizza. Because the price of hamburgers remains constant, the consumer will substitute hamburgers for pizza