Suppose wages in the market for plumbers increase. Some plumbers start taking on extra plumbing jobs while others cut back on the number of hours they work. What could explain this?
What will be an ideal response?
An increase in wage has an income effect and a substitution effect. The substitution effect implies that when the price of leisure increases, people will work more (and relax less). The income effect implies that when wages increase, total income increases and more expensive things, like leisure time, become more affordable. Hence, the income effect will cause people to work less after a wage increase. While an increase in wage leads to both these effects, the income effect is likely to have been stronger for plumbers who cut back on the number of hours that they worked while the substitution effect is likely to have been stronger for those plumbers who decided to work more.
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In the long run, an economy will produce its potential output if: a. workers mistakenly believe that nominal wages equal real wages
b. the expectations of workers and firms are the same in the long and short run. c. wages and prices are sufficiently flexible. d. the price level is high. e. the price level is low.
Refer to Scenario 1.1 below to answer the question(s) that follow.SCENARIO 1.1: An economist wants to understand the relationship between minimum wages and the level of teenage unemployment. The economist collects data on the values of the minimum wage and the levels of teenage unemployment over time. The economist concludes that a 1% increase in minimum wage causes a 0.2% increase in teenage unemployment. From this information he concludes that the minimum wage is harmful to teenagers and should be reduced or eliminated to increase employment among teenagers.Refer to Scenario 1.1. The collection and use of the data on minimum wage and teenage unemployment over time is an example of
A. empirical economics. B. econometrics. C. economic history. D. law and economics.