EXERCISE 3.10 PREFERENCES AND CULTURE Suppose that the points plotted in Figure

Question

EXERCISE 3.10 PREFERENCES AND CULTURE Suppose that the points plotted in Figure 3.23 reflect the choices of free time and consumption made by workers in these five countries according to our model.
1. Is it possible that people in Turkey and the US have the same preferences? If so, how will a wage rise in Turkey affect consumption and free time? What does this imply about the income and substitution effects?
2.Suppose that people in Turkey and South Korea have the same preferences. In that case, what can you say about the income and substitution effects of a wage increase?
3. If wages in South Korea increased, would you expect consumption there to be higher or lower than in the Netherlands? Why? EXERCISE 3.10 PREFERENCES AND CULTURE Suppose that the points plotted in Figure 3.23 reflect the choices of free time and consumption made by workers in these five countries according to our model.
1. Is it possible that people in Turkey and the US have the same preferences? If so, how will a wage rise in Turkey affect consumption and free time? What does this imply about the income and substitution effects?
2.Suppose that people in Turkey and South Korea have the same preferences. In that case, what can you say about the income and substitution effects of a wage increase?
3. If wages in South Korea increased, would you expect consumption there to be higher or lower than in the Netherlands? Why? 200 150 US Netherlands 2 100 South Korea 50 Turkey Mexico 0 14 17 19 24 Free time per day (hours)

Explanation / Answer

Ans

1.yes it is possible. Consumption will rise but free time will not change. This shows there is zero income and substitution effect. Note the two dots lie exactly at 19

2 income will be negative as usual and substitution effect will be positive as usual but substitution effect is much greater than income effect

3 Higher because people in South Korea work more and have thus more income. This leads to higher consumption

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