Labor supply
039.21.4 – MC – MANK08
40. A consumer has preferences over consumption and leisure, both of which are normal goods. When the wage
decreases, the consumer chooses to consume less leisure. For this consumer the labor supply curve will
a.
slope upward.
b.
slope backward.
c.
be horizontal.
d.
be vertical.
040.21.4 – MC – MANK08
41. Suppose that Elmer’s hourly wage increases, and he decides to work fewer hours. For Elmer, the substitution effect of
the wage change is
a.
only partially offset by the income effect.
b.
more than offset by the income effect.
c.
exactly offset by the income effect.
d.
We do not have enough information with which to answer the question.
041.21.4 – MC – MANK08
42. In the upward-sloping portion of the individual labor-supply curve, the substitution effect is
a.
b.
c.
d.
042.21.4 – MC – MANK08
43. Ryan experiences an increase in his wages. The hours of labor that he supplies to the market would increase if
a.
the income effect is larger than the substitution effect.
b.
the substitution effect is larger than the income effect.
c.
neither the income effect nor the substitution effect apply to Tom’s labor-leisure tradeoff.
d.
Ryan views both labor and leisure as inferior goods.
44. Jake experiences an increase in his wages. The hours of labor that he supplies to the market would decrease if
a.
the income effect is larger than the substitution effect.
b.
the substitution effect is larger than the income effect.
c.
neither the income effect nor the substitution effect apply to Harry’s labor-leisure tradeoff.
d.
Jake views both labor and leisure as inferior goods.
45. Which of the following statements is not correct?
a.
If Fiona gets a higher wage and works more, the substitution effect is greater than the income effect for her.
b.
If Miguel experiences a wage decrease and works less, the income effect is greater than the substitution effect
for him.
c.
If the substitution effect is greater than the income effect, the labor-supply curve is upward sloping.
d.
If the income effect is greater than the substitution effect, the labor-supply curve is downward sloping.
46. Economic studies of lottery winners and people who have inherited large amounts of money show that
a.
the income effect of winning the lottery or inheriting large amounts of money likely outweighs the substitution
effect for most people.
b.
the substitution effect of winning the lottery or inheriting large amounts of money likely outweighs the income
effect for most people.
c.
most people view leisure as an inferior good.
d.
most people’s labor supply is unaffected by changes in wealth.
47. Which of the following examples would illustrate a backward-sloping labor supply-curve?
a.
An increase in a person’s wages results in the person working fewer hours per week.
b.
A decrease in a person’s wages results in the person working more hours per week.
c.
An increase in a person’s wages results in the person working more hours per week.
d.
Both a and b are correct.
Scenario 21-3
Scott knows that he will ultimately face retirement. Assume that Scott will experience two periods in his life, one in which
he works and earns income, and one in which he is retired and earns no income. Scott can earn $250,000 during his
working period and nothing in his retirement period. He must both save and consume in his work period with an interest
rate of 10 percent on savings.
48. Refer to Scenario 21-3. Assume that Scott decides to consume $100,000 in the work period. How much money will
he have available for consumption in his retirement period?
a.
$100,000
b.
$110,000
c.
$150,000
d.
$165,000
49. Refer to Scenario 21-3. If the interest rate on savings increases, it is possible that
a.
Scott will decrease his savings in the work period.
b.
Scott will increase his savings in the work period.
c.
Scott will not change his consumption in the work period.
d.
All of the above are possible.
50. Refer to Scenario 21-3. If the interest rate on savings increases,
a.
Scott will decrease his savings in the work period if the income effect is greater than the substitution effect for
him.
b.
Scott will increase his savings in the work period if the income effect is greater than the substitution effect for
him.
c.
Scott will increase his savings in the work period if the substitution effect is greater than the income effect for
him.
d.
Both a and c are correct.
Figure 21–28
The figure below illustrates the preferences for a representative consumer, Christopher.
51. Refer to Figure 21-28. Interest rates increase by 3 percent. Christopher’s optimal choice point moves from A to B.
Christopher consumes
a.
less while he is younger and saves more than he did before interest rates increased.
b.
more while he is younger and saves more than he did before interest rates increased.
c.
less while he is younger and saves less than he did before interest rates increased.
d.
more while he is younger and saves less than he did before interest rates increased.
Figure 21–29
The figure below illustrates the preferences of a representative consumer, Nathaniel.
52. Refer to Figure 21-29. A change in Nathaniel’s optimum from point A to point B results from
a.
a change in Nathaniel’s preferences.
b.
an increase in the income Nathaniel receives when he is young.
c.
an increase in the interest rate.
d.
a decrease in the interest rate.
53. Refer to Figure 21-29. Interest rates increase by 4 percent. Nathaniel’s optimal choice point moves from A to B.
Nathaniel consumes
a.
less while he is younger and saves more than he did before interest rates increased.
b.
more while he is younger and saves more than he did before interest rates increased.
c.
less while he is younger and saves less than he did before interest rates increased.
d.
more while he is younger and saves less than he did before interest rates increased.
54. Michael faces tradeoffs between consuming in the current period when he is young and consuming in a future period
when he is old. Michael experiences a decrease in the current interest rate he earns on his savings. Michael will save
a.
less in the current period if the substitution effect is greater than the income effect.
b.
less in the current period if the income effect is greater than the substitution effect.
c.
more in the current period if the substitution effect is greater than the income effect.
d.
more in the current period, regardless of the sizes of the income and substitution effects.
55. When considering household savings, the relative price between consuming when young and consuming when old is
the
a.
consumption rate.
b.
interest rate that individuals can earn on their private savings.
c.
prime rate.
d.
federal funds rate.
56. If the interest rate rises, an individual could choose to
a.
increase consumption when young.
b.
increase consumption when old.
c.
decrease consumption when young.
d.
Any of the above could be correct.
57. The substitution effect of an increase in the interest rate will result in an increase in
a.
consumption when young and increase in savings when young.
b.
consumption when old and an increase in savings when young.
c.
consumption when young and an increase in savings when old.
d.
savings when old and an increase in consumption when old.
58. Assume that consumption when young and consumption when old are both normal goods. The income effect of an
increase in the interest rate will result in
a.
an increase in saving when young.
b.
an increase in saving when old.
c.
a decrease in saving when young.
d.
a decrease in saving when old.
59. Jordan is planning ahead for retirement and must decide how much to spend and how much to save while he’s working
in order to have money to spend when he retires. When the income effect dominates the substitution effect, an increase in
the interest rate on savings will cause him to
a.
decrease his savings rate.
b.
increase his savings rate.
c.
continue saving at the current rate.
d.
Any of the above could be correct.
60. Calvin is planning ahead for retirement and must decide how much to spend and how much to save while he’s working
in order to have money to spend when he retires. When the substitution effect dominates the income effect, an increase in
the interest rate on savings will cause him to
a.
increase his savings rate.
b.
decrease his savings rate.
c.
continue saving at the same rate.
d.
Any of the above are possible.
61. John is planning ahead for retirement in a two-period world. When John is young he will earn $1 million, and when
John is old and retired he will be given $50,000 from Social Security. If the interest rate between the two time periods is 7
percent, what is the slope of John’s budget constraint when considering the consumption possibilities between the two
periods if consumption when young is graphed on the horizontal axis and consumption when old is graphed on the vertical
axis?
a.
-0.89
b.
-1.05
c.
-1.07
d.
-1.12
62. Suppose Reta is planning for retirement in a two-period world. In the first period Reta is young and earns $1 million,
and in the second period Reta is old and retired and earns nothing. The interest rate is initially 10 percent, but then it falls
to 7 percent. After the interest rate falls, the
a.
substitution effect will induce Reta to consume more when she is young.
b.
substitution effect will induce Reta to consume less when she is young.
c.
income effect will induce Reta to consume more when she is young.
d.
change in interest rates affects the substitution effect but not the income effect.
63. The opportunity cost of current household consumption is the
a.
wage rate.
b.
market interest rate.
c.
price of the goods consumed.
d.
explicit cost of consumption.
64. Suppose that you have $100 today and expect to receive $100 one year from today. Your money market account pays
an annual interest rate of 25%, and you may borrow money at that interest rate. If you save all your money, how much
money will you have one year from today?
a.
$100
b.
$125
c.
$200
d.
$225
65. Suppose that you have $100 today and expect to receive $100 one year from today. Your money market account pays
an annual interest rate of 25%, and you may borrow money at that interest rate. Suppose that you borrow $60 and spend
$160 today. After you repay your loan one year from today, how much money will you have available for consumption
one year from today?
a.
$0
b.
$25
c.
$50
d.
$75
66. Suppose that you have $100 today and expect to receive $100 one year from today. Your money market account pays
an annual interest rate of 25%, and you may borrow money at that interest rate. Consider the budget constraint between
“spending today” on the horizontal axis and “spending a year from today” on the vertical axis. What is the slope of this
budget constraint?
a.
-0.75
b.
-1.00
c.
-1.25
d.
-2.25
67. Consider the budget constraint between “spending today” on the horizontal axis and “spending a year from today” on
the vertical axis. Suppose that you have $100 today and expect to receive $100 one year from today. Your money market
account pays an annual interest rate of 25%, and you may borrow money at that interest rate. Suppose now that the
interest rate increases to 40%. What happens to the slope of your budget constraint relative to when the interest rate was
25%? The slope
a.
becomes steeper.
b.
becomes flatter.
c.
doesn’t change because the budget constraint shifts in parallel to the original budget constraint.
d.
doesn’t change because the budget constraint shifts out parallel to the original budget constraint.
68. Consider the budget constraint between “spending today” on the horizontal axis and “spending a year from today” on
the vertical axis. Suppose that you have $100 today and expect to receive $100 one year from today. Your money market
account pays an annual interest rate of 25%, and you may borrow money at that interest rate. Suppose now that the
interest rate decreases to 10%. What happens to the slope of your budget constraint relative to when the interest rate was
25%? The slope
a.
becomes steeper.
b.
becomes flatter.
c.
doesn’t change because the budget constraint shifts in parallel to the original budget constraint.
d.
doesn’t change because the budget constraint shifts out parallel to the original budget constraint.
69. If an increase in the interest rate raises savings, then
a.
the substitution effect is greater than the income effect.
b.
the income effect is greater than the substitution effect.
c.
the income effect and the substitution effect move in the same direction.
d.
we are unable to determine the sizes of the income and substitution effects without more information.
70. If an increase in the interest rate lowers savings, then
a.
the substitution effect is greater than the income effect.
b.
the income effect is greater than the substitution effect.
c.
the income effect and the substitution effect move in the same direction.
d.
we are unable to determine the sizes of the income and substitution effects without more information.
71. Giffen goods are
a.
normal goods for which the income effect dominates the substitution effect.
b.
normal goods for which the substitution effect dominates the income effect.
c.
inferior goods for which the income effect dominates the substitution effect.
d.
inferior goods for which the substitution effect dominates the income effect.
72. If Chad’s labor-supply curve is upward-sloping, then, for Chad,
a.
an increase in the wage creates an income effect that is greater than the substitution effect.
b.
an increase in the wage creates a substitution effect that is greater than the income effect.
c.
leisure and consumption are perfect substitutes.
d.
leisure and consumption are perfect complements.
73. If Suzette responds to an increase in the interest rate by decreasing her saving, then, for Suzette,
a.
the increase in the interest rate creates an income effect that is greater than the substitution effect.
b.
the increase in the interest rate creates a substitution effect that is greater than the income effect.
c.
consumption when young and consumption when old are perfect substitutes.
d.
consumption when young and consumption when old are perfect complements.
74. Suppose the price of good X increases and consumers purchase more of good Y. Which of the following statements is
necessarily true about good Y?
a.
Good Y is a normal good.
b.
Good Y is an inferior good, but not a Giffen good.
c.
Good Y is an inferior good and a Giffen good.
d.
Good Y could be a normal or inferior good.
75. If Rita’s labor-supply curve is downward-sloping, then for Rita
a.
an increase in the wage creates an income effect that is greater than the substitution effect.
b.
an increase in the wage creates a substitution effect that is greater than the income effect.
c.
leisure and consumption are perfect substitutes.
d.
leisure and consumption are perfect complements.
76. The income effect of an increase in the interest rate will result in an increase in consumption when
a.
young and an increase in savings when young.
b.
old and an increase in savings when young.
c.
young and a decrease in savings when young.
d.
old and an increase in savings when old.