The real wage in Fantasyland has been constant since 1950. The nominal wage in 2015 was $100, and the Consumer Price Index (CPI) was 200 in 2015. What was the nominal wage in 2002 if the CPI was 50 in 2002? A) Nominal wage = $25 B) Nominal wage = $400 C) Nominal wage = […]
Consider two lottery winners, Tino who is 65 years old and Sasha who is 32 years old. Which of these two would be expected to have the larger income effect, all else equal? A) Sasha B) Tino C) Both would have no income effect. D) Both would have equal income effects. ANSWER B
Using the CPI to compensate workers for inflation is appropriate because, in the face of a change in relative prices, people should be allowed to purchase the same bundle as they did before the price changes. Indicate whether the statement is true or false ANSWER False. This assumes that people would still prefer the […]
If a person supplies fewer hours of labor in response to a wage increase, then A) the substitution effect is greater than the income effect. B) the income effect is greater than the substitution effect. C) the income effect equals the substitution effect. D) the person is not maximizing utility. ANSWER B
In response to an increase in the wage rate, the substitution effect will cause a person to A) supply fewer hours of labor. B) supply more hours of labor. C) supply the same hours of labor. D) have a backward bend in her labor supply curve. ANSWER B
What might explain a professional baseball player having lower production the year after signing a multimillion dollar contract? A) the substitution effect B) the endowment effect C) bounded rationality D) the income effect ANSWER D
Inflation over time necessarily makes consumers worse off. Indicate whether the statement is true or false ANSWER False. Wages also increase over time. Workers may earn the price of some goods in less time than in the past.
If a person supplies more hours of labor in response to a wage increase, then A) the substitution effect is greater than the income effect. B) the income effect is greater than the substitution effect. C) the income effect equals the substitution effect. D) the person is not maximizing utility. ANSWER A
A backward-bending labor supply curve implies that A) the substitution effect dominates the income effect at higher wage rates but not at lower wage rates. B) the substitution effect dominates the income effect at lower wage rates but not at higher wage rates. C) leisure is an inferior good. D) workers are irrational. ANSWER […]
If Bobby thinks that leisure is an inferior good, then his labor supply curve A) is backward bending. B) is always negatively sloped. C) is always positively sloped. D) does not exist. ANSWER C