Labor Economics .

Running head: LABOR ECONOMICS
Labor economics
Name of the student
Name of the university
Author Note

LABOR ECONOMICS
1
a)
When there is change in price, the rise in the rate of wage will have both the
substitution and the income effect. The net combined effect mostly depends on the magnitude
of both substitution and the income effect. In case of substitution effect the equilibrium point
moves from E0 to E2 where the individual will be increasing the hours of leisure when the
wage decreases. As the slope of the indifference curve is found to be downward sloping, the
substitution effect is found to be negative in nature. The move from E1 to E2 shows the pure
effect. On the other hand the income effect states the effect of change in the real income
where the relative price of leisure will be constant in nature. When the leisure is the normal
good, income effect will always be positive which states parallel shift from E2 to E1.
Therefore as wage increases, the leisure also increases from l2 to l1
B)

LABOR ECONOMICS
When the individual is working for long hours or doing overtime they should be
offered higher wage than the normal rate as the workers are working overtime. In order to
work overtime, the worker will have to sacrifice more amount of leisure time and therefore
will be providing more incentives to forgo more leisure. His indifference curve also moves
higher to the point of IC2. He also had to sacrifice l1l2 more leisure’s in order to work
overtime and also earns M1M2 more income than before. He also now works TL2 hours per
day at the hourly wage rate.
c)
By implementing a program which will be increasing the non-labor income, it would
increase the non-labor income which suggest that the budget constraint will be moving
leftward or more towards the origin.
Question 2
a)