Analyzing the Impact of a Wage Increase on Labor Supply
An individual has 24 hours per day to allocate between work and free time. Initially, they earn a wage of €25 per hour and choose to work 8 hours per day. After a promotion, their wage increases to €60 per hour. With this new wage, they decide to work only 7 hours per day.
Analyze this individual's decision to work fewer hours despite the significant wage increase. In your analysis, you must identify and explain the two opposing economic effects that influence their choice of free time, and then determine which of these effects was stronger in this specific scenario.
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CORE Econ
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Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
Ch.3 Doing the best you can: Scarcity, wellbeing, and working hours - The Economy 2.0 Microeconomics @ CORE Econ
Analysis in Bloom's Taxonomy
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An individual has 24 hours per day to allocate between work and free time. Their only source of income is their wage. At a wage of €25 per hour, they find it optimal to work 8 hours, leaving 16 hours of free time. If their wage suddenly increases to €60 per hour, two opposing effects influence their new choice of free time. Which statement correctly analyzes these two effects?
Analyzing the Impact of a Wage Increase on Labor Supply
Evaluating the Impact of a Significant Wage Increase
An individual allocates their 24-hour day between work (which provides income for consumption) and free time. If this individual's hourly wage rate more than doubles, from €25 to €60, it is certain that their total daily consumption will increase, assuming they continue to work a positive number of hours.
Analyzing the Effects of a Wage Increase
An individual who can freely choose their work hours receives a significant pay raise. Match each potential outcome or underlying cause to the economic principle that best explains it.
Analyzing a Worker's Response to a Wage Increase
An individual has 24 hours per day to allocate between work (to earn money for consumption) and free time. Their hourly wage increases significantly, from €25 to €60. In response to this wage increase, the individual chooses to work fewer hours than before. What does this decision imply about the two effects of the wage change on their choice of free time?
Analyzing a Worker's Optimal Choice with a Wage Increase
Analyzing a Worker's Choice After a Wage Increase
An individual has 24 hours per day to allocate between free time and work. They currently earn a wage of €40 per hour and choose to work 6 hours per day, leaving 18 hours of free time. Their wage then increases to €60 per hour. Assume that for this individual, the income effect of this wage increase on their choice of free time is stronger than the substitution effect. Which of the following is the most likely new utility-maximizing choice for the individual?
Analyzing the Effects of a Wage Change on Labor-Leisure Choice
An individual has 24 hours per day to allocate between work and free time. Their wage increases from €40 to €60 per hour. In response to this change, the individual decides to work fewer hours per day. What does this outcome imply about the income and substitution effects on their choice of free time?
An individual who can choose how many hours to work receives a significant pay raise. The overall change in their choice of work versus free time is a combination of two opposing effects. Match each concept related to this wage increase with its correct description.
Evaluating a Labor-Leisure Decision
An individual has 24 hours a day to allocate between work and free time. If their hourly wage increases significantly, it is guaranteed that they will choose to have more free time because the increased income allows them to afford more of all goods, including leisure.
Deconstructing the Impact of a Wage Increase
Evaluating Labor Supply Responses to a Major Wage Increase
Analyzing Labor-Leisure Choices with a Wage Increase
Deconstructing a Labor Supply Decision