Unearned Income Triggers Only an Income Effect
Unearned income, such as a monetary gift, produces only an income effect and not a substitution effect. This is because it does not alter the marginal rate of transformation (MRT) or the opportunity cost of leisure. With no change in the relative incentive to work versus take free time, there is no reason for an individual to substitute between consumption and leisure.
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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
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Unearned Income Triggers Only an Income Effect
Analyzing the Opportunity Cost of Leisure
An architect earns a wage of $75 per hour. They then win a one-time prize of $10,000 in a design competition. Considering only the immediate effect of this prize, what is the new opportunity cost for this architect to take one hour of leisure (e.g., an hour off work)?
A factory worker who earns $20 per hour receives a one-time, unexpected bonus of $500. As a direct result of this bonus, the amount of income they give up by taking an hour off work has now increased.
Impact of Non-Labor Income on Opportunity Cost
Impact of Non-Labor Income on Opportunity Cost
An individual's daily trade-off between leisure and consumption is represented by a budget constraint line on a graph, with 'Hours of Leisure' on the horizontal axis and 'Consumption ($)' on the vertical axis. The slope of this line is determined by their hourly wage. If this individual receives a large, one-time cash gift, how will their budget constraint line change?
An individual's opportunity cost of free time is the amount of consumption they give up for an additional hour of leisure. For each scenario below, match it with the correct effect on this opportunity cost.
Evaluating a Claim about Opportunity Cost
Evaluating a Claim about Opportunity Cost
A freelance consultant charges $150 per hour for their services. They also receive a one-time government tax rebate of $600. The opportunity cost for this consultant to take one hour of leisure is $____.
Learn After
An individual is paid a fixed hourly wage for their work. One day, they receive a significant, one-time cash gift from a family member. Assuming that time off from work is a 'normal good' for this individual, what is the most likely impact of this gift on their work-leisure choice, and what economic principle explains this change?
An individual who works for an hourly wage wins a small, lump-sum lottery prize. They subsequently decide to reduce their weekly work hours. This change in behavior is correctly explained by the substitution effect outweighing the income effect.
Analyzing the Effects of a Windfall Gain
Comparing Responses to Different Types of Income Gains
Analyzing Labor Supply Responses to Policy Changes
Evaluating Economic Relief Policies
For an individual who can choose how many hours to work, match each change in their financial circumstances to the correct description of its impact on their work-leisure decision.
A one-time, lump-sum government stimulus check does not produce a substitution effect on an individual's work-leisure choice because it does not change the __________ of taking an hour of free time.
An individual's choice between work and free time can be shown on a graph with 'Consumption' on the vertical axis and 'Hours of Free Time' on the horizontal axis. The slope of the line representing all possible combinations of consumption and free time is determined by the hourly wage. If this individual receives a large, one-time, non-work-related cash payment, how will the line representing their possible choices change?
Evaluating an Economic Argument
Comparing Responses to Different Types of Income Gains