6 Equilibrium hours of work for an individual occurs a at th

6. Equilibrium hours of work for an individual occurs: (a) at the point on the budget constraint where the wage equals the marginal rate of substitution. (b) where the marginal rate of substitution is maximized. (c) on the highest indifference curve. (d) at the point on an indifference curve where the additional utility of working one more hour is zero. 7. Assuming leisure is a normal good, a decrease in non-labor income will cause (a) a reduction in work hours (b) an increase in work hours. (c) no change in work hours. (d) the change in work hours depends on the relative size of the income and substitution effects. 8. If the income effect is larger than the substitution effect: (a) a person will work zero hours b) the labor supply curve will be positively sloped. (c) whether a person works more or less in response to a wage increase cannot be predicted. a) the labor supply curve will be negatively sloped.

Solution

6) A. Consumer is at equilibrium where Budget line is tangent to indifference curve.The slope of IC is MRS and slope of budget line is MRS.

7)leisure is a normal good, thus a decrease in non labor income will cause a reduction in leisure hours and an increase in work hours. Ans is B

8) If income effect is larger than substitution effect, the labor supply curve will be negatively sloped because an increase in wage rate makes substitution effect to work more but income effect makes leisure to increase. Thus leisure increase effect is dominant compared to substitution effect which makes more work, thus leisure increases and total work hours decreases leading to negative relation and backward bending supply curve.