Please read and answer the following questions 1. (Advanced) If there is a reduc

Question

Please read and answer the following questions

1. (Advanced) If there is a reduction in the price of a chocolate bar, what does our theory predict will happen to labor supply?

2. (Advanced) Suppose the government imposes a tax on labor. What will that tax do to the labor supply of a household and its demands for downloads and chocolate bars?

3. (Advanced) If one member of a two-person household gets a raise, what will that do to the hours worked by that person and to the other household member? Explain this using income and substitution effects. Could this raise cause the other household member not to work at all?

Explanation / Answer

1. In case of reduction in the price of a chocolate bar, the demand for the chocolate bars will increase which will warrant more production. In order to increase the production the resources put in by the firms will have to be increased including labor thereby increasing demand and supply of labor.

2. Tax on labor will reduce the time spent by the workers in the legal market and will increase their time spent in household or underground market. The decrease in the labor supply will result in lower production there by leading to increase in the prices of chocolate bars.

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