Question

2) A decrease in the real wage
A) unambiguously increases consumption and increases labour supply.
B) increases consumption and has an ambiguous effect on labour supply.
C) has an ambiguous effect on consumption and increases labour supply.
D) has an ambiguous effect on both consumption and labour supply.
E) decreases consumption and has an ambiguous effect on labour supply.
3) If labour supply curve is downward sloping, then
A) There is no substitution effect
B) Substitution effect is exactly equal to income effect
C) Income effect is greater that substitution effect
D) Substitution effect is greater that income effect
E) None of above
4) When consumption and leisure are both normal goods, and the lump-sum tax decreases, the
rational consumer
A) increases consumption and increases labour supply because of substitution effect
B) increases consumption and reduces labour supply because of substitution effect
C) increases consumption and increases labour supply because of income effect
D) increases consumption and reduces labour supply because of income effect
E) None of above
5) According to our standard assumptions about a production function, as the quantity of labour
decreases, the marginal product of labour
A) is constant.
B) increases.
C) decreases.
D) may either increase or decrease.
E) gets more expensive.

Answer 1

Due to presence of HOMEWORKLIB POLICY, I am answering first question.

2.

Ans: E.

Explanation:

Budget is given as follows:

C + wL = w(T - L)

where,

L = Leisure

C = consumption

w = real wage.

When w falls, both substitution and income effect lead to fall in c. On the other hand there is ambiguous effect on labor supply as substitution effect increases leisure(decreases labor) and income effect decreases leisure(increases labor).

If you are satisfied with the answer, please provide a positive rating. Feel free to comment in case of queries.

Have a nice day ahead!