Pam has a weekly unearned income of $200 (which comes from winning a beauty contest). She works 30 hours a week (out of a maximal 100 hours in the week) at a wage rate of $10. Her wage increases to $14/hour. Pam has a compensated wage elasticity of 0.4 and an income elasticity of -0.5.
a) Find the percentage increase in Pam's wage rate due to this wage change. Write down the formula for calculating an uncompensated wage elasticity from the compensated wage elasticity and the income elasticity.
b) Calculate Pam's uncompensated wage elasticity. Is it positive or negative? What does this say about the relative sizes of the income and substitution effects?
c) What is the percentage change in hours worked due to the substitution effect and the income effect of the wage increase?