Assignment:
The "supply-side" tax cuts of the early 1980s were predicated on the idea that they would stimulate incentives to work and thereby increase economic growth.
1. Demonstrate this on a labor/leisure choice diagram. What does this predicted outcome assume about the relative strengths of the income and substitution effects? Explain your reasoning carefully.
2. For each group identified in bold type below, use the labor-leisure choice model to illustrate graphically and ten explain the change in the quantity of leisure desired. Be sure toexplain how the group's labor force participation rate is affected.
a. the earnings of married men have decreased, thereby reducing the non-wage incomes of married women.
b. Real wage rates for women have increased. Further, the substitution effect for women is stronger than the income effect.
c. Real wage rates for men have increased. Further, the substitution effect for men is dominated by the income effect.
d. Married women exhibit a stronger preference for market work over other non-market uses of time.
e. Social Security hasincreased benefits and widened coverage for older citizens.
3. Prior to the year 2000 Social Security earnings over $17,000 per year were taxed at a rate of33 percent, and a retiree earning over $47,000 per year lost all social security benefits. Assuming the retiree receives $10,000 in Social Security benefits, use the labor-leisure choice model to analyze how a representative individual's labor force participation will likely be affected after 2000 when the earnings test was eliminated (retired workers are now free to work and collect benefits without a penalty). Show the situation prior to 2000, and after 2000 in your diagram. Explain yhour reasoning carefully.
4. Explain how Becker's model of household choice differs from the labor-leisure model. What are the decision variables for the household? What is the household production function?
a) Explain how a change in technology influence choicevariables?
b) Explain how the substitutability between market and household work influence choice variables?
c) Explain how changes in preferences regarding household work over time influence choice variables?
d) Explain how the presence of children affect choice variables?
e) Discuss how an extension of this model might include the number of children ''time intensive commodity" as a choice variable. Would you expect the wealthier families to have more or fewer children? Explain why.