Answer the following questions 1Distinguish between an Incom

Answer the following questions:

1.Distinguish between an Income Effect and a Substitution Effect of an increase in the wage rate.

2. Distinguish between Welfare Programs and Work Incentives.

3. Distinguish between the Added Worker Effect and the Discouraged Worker Effect.

Solution

Answer 3. \"The added-worker effect can be explained in terms of the income effect, while the discouraged-worker effect is based on the substitution effect\". The reason is the added worker effect is based on a reduction in the partner\'s non-wage income. The discourged worker effect can be explained by a reduction in the expected wage rate (the potential wage adjusted for the reduced probablity of finding a job.)