Question

explain by drawing:

The effect of a decrease in labor income on work hours.

Answer 1

This comes under the topic Labour-Liesure tradeoff & Labour Supply. The answer has been thoroughly explained in the following attachments:
effect of decrease in labour income on work hours! Labour income here can be interpretted as the wage rate paid to the workers. This is the case of the labour-leisure trade-off which can be explained using the substitution oftest of the income effect which are a consequence of any changes in the wage rate. SUBSTITUTION EFFECT : When the wage rate falls, the opportunity cost or the price of leisure also reduces. As a the price of any normal good falls, it's demand also oises. :: the labour will substilüete Arout Leisure for Hence, the substitution effect is positive. → The extra utility of $1 worth of leisure MULe is the marginal utility of an extra hour of outer leisure. MUY be the marginal utility of an $1 of income. & Utility will be maximized when :- MULE labour work. MULe w where 2 Let an additional $1 Py MUY Mure Now, when w falls that increases MU of $1 worth of leisure. [W' reduced wage rate ] Ру . An individual in such a condition will increase amount of leisure & reduce the number of working hours that until the above stated equation becomes equal. the

good, ité : No When the wage rate INLOME EFPELT i Adecrease i income, & unice lisure is a normal wage rate means lower demanded will quantity down on hence, no. of working hours will increase. . Income effect is negature Stuce both the effects work in opposite direction, the net effect of decreased wage rate on number of working hours become inconclusive unless the exact magnitude of both is known. : * SE >IE : No. of working hours will fall. Y SE CIE of working houre will increase of St = IE: No. of working hours will remain unchanged. DIAGRAMMATIC ILLUSTRATION - • decrease from $40 to $20, the number of working hours have → Backward bending implice that the income rien from 9 to 12. The effect is stronger than o when the wage further reduces from $20 to $10, the no. No. of hours worked also fall from 12 to 6 as showns at point A. & the SE TIE in this care. Therefore, whether the decrease in wage rate will increase / decrease the number of working hours, depends on the position of on the labour supply curne - Theoretically, it of 잉 MULE & MUY. D Labour supply 0 curve. Wage Rate the SE in this case. rate 12 x-axis of working hours depends upon the values