ANSWERS TO SELECTED END-OF-CHAPTER QUESTIONS

CHAPTER 2 –

2. A worker will work more hours in (a) and (b) and fewer hours in (c) and (d).

4. The outcome assumes the substitution effect is stronger than the income effect. The statement reflects empirical evidence that the substitution effect strongly dominates the income effect for females, but they roughly offset each other for males.

5. Lauren will choose the high-wage option. She will feel underemployed, but this option will allow her to reach a higher indifference curve (a higher level of utility.)

6. The lump-sum tax increases work effort through a pure income effect; the proportional tax may either increase or reduce work effort depending on the relative strengths of the opposing income and substitution effects.

11. The subsidy is $2400 ($3000 – .3 x $2000). The total income is $4400 ($2000 + the $2400 subsidy.) The break-even level of income is $10,000 ($3000 / .30).

12. HBW’ entails a zero benefit-reduction rate and the weakest disincentives to work. In contrast, HBYW entails a 100% benefit-reduction rate and the strongest disincentives to work. The statement that “the higher the basic benefit and the higher the benefit reduction rate, the weaker the work incentive” is consistent with the above findings.
15. An increase in the minimum wage may either increase or decrease desired work hours for those already in the labor market depending on the relative strengths of the substitution and income effects. The substitution effect of the higher wage will increase desired hours of work while the income effect will decrease desired hours of work. For those not in the labour force, there is only an income effect, encouraging participation. A direct grant of nonlabour income has only an income effect, reducing desired hours of