Part 1
Suppose that the owner of Boyer Construction is feeling the pinch of increased premiums associated with workers' compensation and has decided to cut the wages of its two employees (Albert and Sid) from $21 per hour to $19 per hour. Assume that Albert and Sid view income and leisure as "goods," that both experience a diminishing rate of marginal substitution between income and leisure, and that the workers have the same before- and after-tax budget constraints at each wage. Albert and Sid's opportunity set is presented below:
What is the value of A when the wage is $21?
What is the value of A when the wage is $19?
At the wage of $21 per hour, both Albert and Sid are observed to consume 12 hours of leisure (and equivalently supply 12 hours of labor). After wages were cut to $19, Albert consumes 10 hours of leisure and Sid consumes 14 hours of leisure. Determine the number of hours of labor each worker supplies at a wage of $19 per hour:
Albert's supply of labor =
Sid's supply of labor =
How can you explain the seemingly contradictory result that the workers supply a different number of labor hours?
Albert has no substitution effect, and Sid has no income effect when the wage declines to $19.
Albert's substitution effect dominates his income effect when the wage declines to $19, and vice versa for Sid.
Albert's income effect dominates his substitution effect when the wage declines to $19, and vice versa for Sid.
Albert has no income effect, and Sid has no substitution effect when the wage declines to $19.
Part 2
In the below figure, a consumer is initially in equilibrium at point C. The consumer's income is $450, and the budget line through point C is given by $450 = $150X + $225Y. When the consumer is given a $150 gift certificate that is good only at store X, she moves to a new equilibrium at point D
a. Determine the prices of goods X and Y.
Price of X: $
Price of Y: $
b. How many units of product Y could be purchased at point A?
c. How many units of product X could be purchased at point E?
d. How many units of product X could be purchased at point B?
e. How many units of product X could be purchased at point F?
f. Based on this consumer's preferences, rank bundles A, B, C, and D in order from most preferred to least preferred.
g. Is product X a normal or an inferior good?