Topic 1 - Review Questions (Part 1) - 2156

In the neo-classical model of labor supply, the substitution effect causes a worker to work more if the wage increases.

• TRUE

• FALSE

In the neo-classical model of labor supply, the income effect causes the worker to work more hours if wage increase.

• TRUE

• FALSE

In the neo-classical model of labor supply, if leisure is a normal good, a wage increase causes an increase in hours worked.

• TRUE

• FALSE

Which of the following statement regarding an individual's budget constraint is correct?

• The slope of the budget constraint is determined by the market wage rate.

• The level of non-labor income determines the intercept of the budget constraint.

• The slope of the budget constraint is determined by the reservation wage rate.

• The level of non-labor income is higher for a part-time worker than for a full time worker

• The slope of the budget constraint is higher for a full-time worker than for a part-time worker

The slope of the indifference curve at the lower right-hand corner of the income/leisure diagram, where zero hours are supplied to the labour market, is equal to:

• The prevailing market wage rate

• The reservation wage

• The slope of the budget constraint

• The indifference between the market wage and the reservation wage