Substitution & Income Effect Questions (Check Work)?

Question

Consider Paul, who has the following labor supply curve:

http://courses.aplia.com/problemsetassets/textbooks/taylor_micro/ch13_I/3_static_graph.gif

#1 - In Region I (wages above $35 per hour), a rise in Paul's hourly wage causes him to choose to work fewer hours. This is because the income effect of the higher wage ______ the substitution effect of the higher wage.

A. Outweighs

B. Is outweighed by

C. Is exactly offset by

My Answer: A - outweighs

#2 - In Region II (wages between $25 and $35 per hour), a rise or fall in Paul's hourly wage does not affect the number of hours he chooses to work. This is because the income effect of the higher wage ______ the substitution effect of the higher wage.

A. Is exactly offset by

B. Outweighs

C. Is outweighed by

My Answer: A - is exactly offset by

(Another Question Below)

Answer 1

all of your answers are correct

Answer 2

i checked all your answers and they are all right.

its good that you got it checked before submitting your answers to your teacher.

Just remember when Substitution effect(SE) is greater than Income effect(IE) the labour will work more.he has to work to afford leisure. You will have a upward sloping labour supply curve.

When IE>SE worker will work less as he is more better off, he chooses leisure while earning more.

This is for executives ( just for your explanation).

hence the labour supply curve is downward sloping.

By combining both, we get a backward bending labour supply curve. This information will help you in your bsc. Note it.