Deck 35: Indifference Curve Analysis of Labor Supply

Question 1

Use the following to answer questions
Figure: Income and Leisure Opportunities
(Figure: Income and Leisure Opportunities) The figure Income and Leisure Opportunities refers to Keisha when she has 100 hours per week for working or leisure. There are two time allocation lines, one for a $10 hourly wage rate and one for a $20 hourly wage rate. Keisha's optimal choice is point A when the wage is $10, and her optimal choice is point C when the wage is $20. As the amount she earns increases from $10 per hour to $20 per hour, Keisha will work _____ hours because of the income effect.

A) 10 fewer
B) 15 more
C) 25 fewer
D) 50 more

Answer 1

25 fewer

Question 2

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Figure: The Time Allocation Budget Line
(Figure: The Time Allocation Budget Line) Look at the figure The Time Allocation Budget Line. If the wage rate rises, then the time allocation budget line will rotate _____ along the _____ axis.

A) left; leisure
B) up; income
C) right; leisure
D) down; income

Answer 2

up; income

Question 3

If the labor supply curve bends backward, then the backward-bending portion reveals that _____ is a(n) _____ good and the _____ effect is greater than the _____ effect.

A) labor; normal; income; substitution
B) labor; inferior; substitution; income
C) leisure; normal; income; substitution
D) leisure; inferior; substitution; income

Answer 3

leisure; normal; income; substitution

Question 4

Kurt earns a wage of $100 per hour; Jim earns a wage of $10 per hour. To maximize utility, Kurt works 45 hours per week and Jim works 50 hours per week. The value of an additional hour of leisure is:

A) higher for Jim than for Kurt.
B) higher for Kurt than for Jim.
C) less than $100 for Kurt.
D) greater than $10 for Jim.

Question 5

An individual will allocate time between labor and leisure by finding the point at which:

A) he or she maximizes utility while remaining beneath the time allocation budget line.
B) the time allocation budget line is just tangent to an indifference curve.
C) he or she reaches the lowest possible indifference curve while still on the time allocation budget line.
D) he or she is indifferent between work and leisure.

Question 6

Assume Alex is maximizing utility by working 51 hours per week and his wage is $15 per hour. Which of the following statements is CORRECT?

A) In equilibrium, the value of an additional hour of leisure for Alex is less than $15.
B) Alex is probably not on the highest indifference curve that touches the time allocation budget line.
C) The marginal utility Alex gets from the extra money he earns from an additional hour spent working is equal to the marginal utility of an additional hour of leisure.
D) In equilibrium, the value of an additional hour of leisure for Alex is more than $15.

Question 7

Use the following to answer questions
Figure: The Time Allocation Budget Line
(Figure: The Time Allocation Budget Line) Look at the figure The Time Allocation Budget Line. If the wage rate decreases, then the time allocation budget line will rotate _____ along the _____ axis.

A) left; leisure
B) up; income
C) right; leisure
D) down; income

Question 8

Dorothy is trying to decide how to allocate her time between work and leisure. Suppose that she can work a maximum of 75 hours per week. If she can earn $15 per hour, the vertical intercept of her time allocation budget line (with income plotted vertically and leisure plotted horizontally) is:

A) $15.
B) 75 hours.
C) 5
D) $1,125.

Question 9

Miss Marple spends her entire leisure time gardening. She values the marginal utility of the last hour spent gardening at $17. She could earn $20 if she worked an additional hour. Assuming that Miss Marple wants to maximize her utility, which of the following is CORRECT?

A) She should spend more time gardening and less time working to balance the stress of work with the relaxation provided by a hobby.
B) She should spend more time gardening and less time working, since leisure activities are usually characterized by increasing marginal utility.
C) She should reallocate her time away from gardening and toward more work.
D) This question cannot be answered without knowing how many hours she spends working and how many hours she spends gardening.

Question 10

An increase in the wage rate will:

A) normally generate a small income effect.
B) generate a significant decrease in after-tax income.
C) possibly lead people to choose more leisure rather than work more, since leisure is a normal good.
D) cause businesses to increase the number of employees to reduce costs.

Question 11

Javon has 80 hours per week to allocate between labor and leisure. Graph hours of leisure per week on the horizontal axis and income per week on the vertical axis. If Javon's hourly wage is $8, then the horizontal intercept of his time allocation budget line is:

A) $8.
B) $640.
C) 40 hours.
D) 80 hours.

Question 12

Diana's labor supply curve changes slope and begins to bend backward at a wage of $44. Thus, for a wage _____ $44, the substitution effect of a wage increase will _____.

A) above; cause Diana to work fewer hours
B) below; cause Diana to work fewer hours
C) below; dominate the income effect
D) above; cause Diana to work more hours

Question 13

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Figure: Income and Leisure Opportunities
(Figure: Income and Leisure Opportunities) The figure Income and Leisure Opportunities refers to Keisha when she has 100 hours per week for working or leisure. There are two time allocation lines, one for a $10 hourly wage rate and one for a $20 hourly wage rate. Keisha's optimal choice is point A when the wage is $10, and her optimal choice is point C when the wage is $20. As the amount she earns increases from $10 to $20 per hour, Keisha will work _____ hours because of the substitution effect.

A) 10 fewer
B) 15 more
C) 25 fewer
D) 50 more

Question 14

During the holiday season some people take a second job or work more hours. From this we know that:

A) the income effect becomes more powerful than the substitution effect during the holiday season.
B) the substitution effect becomes more powerful than the income effect during the holiday season.
C) the income and substitution effects cancel each other out during the holiday season.
D) people want to spend more time with their family during the holiday season.

Question 15

Javon has 80 hours per week to allocate between labor and leisure. Graph hours of leisure per week on the horizontal axis and income per week on the vertical axis. If Javon's hourly wage is $8, then the opportunity cost of an hour of leisure is:

A) $8.
B) $10.
C) $640.
D) $800.

Question 16

If an individual's labor supply curve is upward-sloping at low wage rates and downward-sloping at high wage rates, then at higher wage rates:

A) there is no substitution effect as wages change.
B) there is no income effect as wages change.
C) the income effect dominates the substitution effect.
D) the substitution effect dominates the income effect.

Question 17

Javon has 80 hours per week to allocate between labor and leisure. Javon's wage is $8 per hour. Graph hours of leisure per week on the horizontal axis and income per week on the vertical axis. According to the optimal time allocation rule, Javon should allocate his time such that the marginal utility of an additional hour of leisure is:

A) $8.
B) $10.
C) $640.
D) $800.

Question 18

Javon has 80 hours per week to allocate between labor and leisure. Graph hours of leisure per week on the horizontal axis and income per week on the vertical axis. If Javon's hourly wage is $8, then the vertical intercept of his time allocation budget line is:

A) $8.
B) $640.
C) 40 hours.
D) 80 hours.

Question 19

The time allocation budget line shows an individual's _____ and the income that allows consumption of marketed goods.

A) preferences for leisure
B) trade-offs between the consumption of leisure
C) labor supply for the consumption of leisure
D) indifference between the consumption of leisure

Question 20

Consider the time allocation budget line for Priya. Put hours of leisure on the horizontal axis and income on the vertical axis. If Priya can allocate 100 hours per week to either leisure or work and her wage per hour is $18, then the vertical intercept is _____ and the slope of the time allocation budget line is _____.

A) $180; 18
B) $1,800; 18
C) $1,800; -18
D) $720; 18

Question 21

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Figure: Income and Leisure Opportunities
(Figure: Income and Leisure Opportunities) Given Keisha's preferences and opportunities for income and leisure shown in the figure Income and Leisure Opportunities, Keisha sees leisure as:

A) a normal good.
B) an inferior good.
C) a complement to working.
D) The answer is impossible to determine with the information given.

Question 22

While individual labor supply curves may bend backward, market labor supply curves are likely to be upward-sloping throughout, since higher wages induce new workers to enter the labor market.

Question 23

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Figure: Davina's Labor Supply Choice
(Figure: Davina's Labor Supply Choice) The figure Davina's Labor Supply Choice shows Davina's time allocation budget line when her hourly wage is $10 or $15 and she has 80 hours to allocate between labor and leisure; it also shows two of her indifference curves for income and leisure. When Davina earns $15 per hour, she works _____ hours and enjoys _____ hours of leisure.

A) 20; 60
B) 30; 50
C) 40; 40
D) 50; 30

Question 24

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Figure: Joanna's Time Allocation Budget Line
(Figure: Joanna's Time Allocation Budget Line) The figure Joanna's Time Allocation Budget Line depicts what happens when she can choose how to spend 40 hours. What is Joanna's wage rate?

A) $10.00
B) $12.50
C) $40.00
D) $15.00

Question 25

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Figure: Joanna's Time Allocation Budget Line
(Figure: Joanna's Time Allocation Budget Line) Joanna's Time Allocation Budget Line depicts what happens when she can choose how to spend 40 hours. If Joanna's wage rate increases and she ends up working MORE hours:

A) leisure became relatively more expensive.
B) leisure became relatively less expensive.
C) leisure did not change in price.
D) she does not know how to allocate her time effectively.

Question 26

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Figure: Davina's Labor Supply Choice
(Figure: Davina's Labor Supply Choice) The figure Davina's Labor Supply Choice shows Davina's time allocation budget line when her hourly wage is $10 or $15 and she has 80 hours to allocate between labor and leisure; it also shows two of her indifference curves for income and leisure. Davina's labor supply curve is _____ as her hourly wage rises from $10 to $15.

A) upward-sloping
B) downward-sloping
C) vertical
D) horizontal

Question 27

Alex's wage rate falls. Holding everything else constant, Alex's new time allocation budget line will:

A) shift in toward the origin, parallel to the old one.
B) shift away from the origin, parallel to the old one.
C) rotate to the left on the x-axis.
D) rotate down on the y-axis.

Question 28

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Figure: Davina's Labor Supply Choice
(Figure: Davina's Labor Supply Choice) The figure Davina's Labor Supply Choice shows Davina's time allocation budget line when her hourly wage is $10 or $15 and she has 80 hours to allocate between labor and leisure; it also shows two of her indifference curves for income and leisure. As Davina's hourly wage rises from $10 to $15:

A) the income effect is greater than the substitution effect.
B) the substitution effect is greater than the income effect.
C) the substitution effect is equal to the income effect.
D) It is impossible to compare the income and substitution effect.

Question 29

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Figure: Rita's Time Allocation Budget Line
(Figure: Rita's Time Allocation Budget Line) Look at the figure Rita's Time Allocation Budget Line. It is based on 80 hours available for labor and leisure. If her hourly wage doubles, the new time allocation budget line will have a point at _____ hours of leisure and _____ in income.

A) 30; $1,000
B) 40; $400
C) 50; $700
D) 60; $280

Question 30

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Figure: Joanna's Time Allocation Budget Line
(Figure: Joanna's Time Allocation Budget Line) The figure Joanna's Time Allocation Budget Line depicts what happens when she can choose how to spend 40 hours. What is the opportunity cost of an hour of leisure?

A) $10.00
B) $12.50
C) $40.00
D) $15.00

Question 31

If leisure is a normal good for Randy, then both the substitution effect and the income effect of a decrease in the wage rate will cause Randy to work fewer hours.

Question 32

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Figure: Rita's Time Allocation Budget Line
(Figure: Rita's Time Allocation Budget Line) Look at the figure Rita's Time Allocation Budget Line. It is based on 80 hours available for labor and leisure. If her hourly wage doubles, the vertical intercept will be:

A) $1,120.
B) $1,400.
C) $1,600.
D) $2,000.

Question 33

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Figure: Rita's Time Allocation Budget Line
(Figure: Rita's Time Allocation Budget Line) Look at the figure Rita's Time Allocation Budget Line. It is based on 80 hours available for labor and leisure. Rita chooses 40 hours of leisure and income of $280. When her hourly wage doubles, Rita chooses 30 hours of leisure and income of $700. The substitution effect is making her work _____, the income effect is making her work _____, and the substitution effect is _____ than the income effect.

A) more; less; stronger
B) less; more; stronger
C) more; less; weaker
D) less; more; weaker

Question 34

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Figure: Davina's Labor Supply Choice
(Figure: Davina's Labor Supply Choice) The figure Davina's Labor Supply Choice shows Davina's time allocation budget line when her hourly wage is $10 or $15 and she has 80 hours to allocate between labor and leisure; it also shows two of her indifference curves for income and leisure. When Davina earns $10 per hour, she works _____ hours and enjoys _____ hours of leisure.

A) 20; 60
B) 30; 50
C) 40; 40
D) 50; 30

Question 35

To maximize utility, an individual should allocate time so that the marginal utility of the earnings from an hour spent working is equal to the marginal utility of an additional hour of leisure.

Question 36

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Figure: Rita's Time Allocation Budget Line
(Figure: Rita's Time Allocation Budget Line) Look at the figure Rita's Time Allocation Budget Line. It is based on 80 hours available for labor and leisure. Her hourly wage is:

A) $5.60.
B) $7.00.
C) $8.00.
D) $10.00.

Question 37

If an individual's wage rate decreases, the substitution effect will cause the individual to work fewer hours.

Question 38

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Figure: Rita's Time Allocation Budget Line
(Figure: Rita's Time Allocation Budget Line) Look at the figure Rita's Time Allocation Budget Line. It is based on 80 hours available for labor and leisure. Rita chooses 40 hours of leisure and income of $280. When her hourly wage doubles, Rita chooses 50 hours of leisure and income of $420. The substitution effect is making her work _____, the income effect is making her work _____, and the substitution effect is _____ than the income effect.

A) more; less; stronger
B) less; more; stronger
C) more; less; weaker
D) less; more; weaker

Question 39

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Figure: Joanna's Time Allocation Budget Line
(Figure: Joanna's Time Allocation Budget Line) The figure Joanna's Time Allocation Budget Line depicts what happens when she can choose how to spend 40 hours. If Joanna's wage increases and as a result she consumes LESS leisure, her supply curve of labor is:

A) horizontal.
B) upward-sloping.
C) downward-sloping.
D) vertical.

Question 40

Kaile earns $10 as a lab technician. She can work up to 60 hours per week but usually works 35 hours. She spends several hours every week reading in the park. She says she likes this because it is free. Kaile is right: sitting in the park with a book is costless.

Question 41

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Figure: Joanna's Time Allocation Budget Line
(Figure: Joanna's Time Allocation Budget Line) Joanna's Time Allocation Budget Line depicts what happens when she can choose how to spend 40 hours. If Joanna's wage rate increases and she ends up working more hours, for her:

A) the substitution effect dominates.
B) the income effect dominates.
C) the substitution and income effects cancel each other out.
D) the substitution effect becomes ineffective.
Answer Key