8. Suppose AD is the original budget constraint, and F is the optimal consumptio

Question

8. Suppose AD is the original budget constraint, and F is the optimal consumption bundle for the representative consumer. Suppose the nominal wage rate W decreases, and t new budget constraint is ED. The substitution effect is from which point to which point? The income effect is from which point to which point (Figure 2)? b, FK2 and K2 G 9. Suppose ED is the original budget constraint, and G is the optimal consumption bundle for the representative consumer. A movement from point G to point F...Figure 2) a. will increase the consumer's utility b. will decrease the consumer's utility c. may increase or decrease the consumer's utility d. will not effect the consumer's utility 10. Suppose ED is the original budget constraint, and G is the optimal consumption bundle for the representative consumer. After an increase in the wage rate, a movement from point G to point F implies that...(Figure 2) a. labor supplied increased b. labor supplied decreased c. labor supplied stayed the same d. cannot determine labor supplied changes

Explanation / Answer

8) due to fall in nominal wage rate, opportunity cost of leisure decreases. so, leisure become relative cheaper. so, substitution effect decreases consumption and increases leisure. so, consumer move from point F to point K2 . and due to fall in income, income effect decreases both leisure and consumption. (we are assuming leisure is a normal good.) so, consumer move from point K2 to point G.

so, correct option is B.

9) a movement from point G to point F will increase the consumers utility. because consumer move to higher indifference curve.

so, correct option is A.

10) a movement from point G to point F implies that labour supplied decreased. because leisure is increases. it means income effect dominating substitution effect.

so, correct option is B.

11) a movement from point G to point F imples that income effect dominated. because substitution effect decreases leisure and income effect increases leisure. here leisure is increasing.

so, correct option is B.

12) a movement from point G to point F implies that consumption , leisure increase and emploment decreases.

so, correct option is C.

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