Q.1. Answer the following questions using the concepts of labor supply, substitu
ID: 1161050 • Letter: Q
Question
Q.1. Answer the following questions using the concepts of labor supply, substitution effect and income effect. Draw graphs to ilustrate your responses. a) (2.5 points) Imagine you are a Graduate student earning $25/hour. Now, due to the hard work put in by your Grad Employees Organization, your wage rate increases from $25/hour to $32/hour. Would you work for more or less number of hours? (Assume there is no legal restriction on the number of hours you work for.) b) (2.5 points) Imagine you hold a managerial position in a big tire-manufacturing company. Your salary is $125/hour. Super pleased with your work, your boss brings you the offer that if you work for more hours for the company, they will pay you $150/hor. Would you accept their proposal and supply more labor? Q.2. a) (2.5 points) Do you think labor-market discrimination is a real-life phenomenon in current times? If yes, give examples of two occupations whose labor markets witness discrimination (EXCEPT market for care work). Why have not competitive markets eliminated discrimination? b) (2.5 points) How do the participants in the market for care work suffer because of such discrimination (i.e., by crowding women into this occupation)?Explanation / Answer
1) a. Increase in wage from 25 to 32 per hour generates two effects- income effect and substitution effect.
Income effect says that if wage increases both leisure hours and work hours should increase.
Substitution effect says that wage increase should lead to increase in leisure hours and decrease in labor hours becuase same basket of goods can be purchased by working less hours.
So the net effect depends on which effect outweighs.
If substitution effect outweighs income effect, labor supply increases otherwise labor supply decreases.
b. When you get higher wage of 150 per hour, only substitution effect is generated. There is no income effect. You get higher wages only if you work more.
According to substitution effect, increase in overtime wage leads to increase in labor supply.
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