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income effect of a fall in wages

1. How will the income effect of a fall in wages affect hours worked?

2. How will the substitution effect of a fall in wages affect hours worked?

Explain your answers using concepts from the reading assignment as well as your personal experiences.

What conflicts may exist between a firm's desire to maximize profits and its ethical obligations? Provide some real-world situations in presenting your responses.

Solution Preview

Income effect describes the effects of changes in prices on consumption. According to the income effect, an increase in price causes a buyer to feel poorer, lowering the quantity demanded, and vice versa. Although the buyer's actual income hasn't changed, the change in price makes the buyer feel as if it has. In relation to how the income effect will affect hours worked is simple. To stay at the same wage weekly income, the number of hours worked will have to increase. The wage an employer pays an employee exerts an important influence on employee's decisions to participate in the labor market and on the number of hours spent working. Labor economists have well-developed economic theory which explains two effects, the ...

Solution Summary

This solution discusses how the income effect of a fall in wages affect hours worked; How the substitution effect of a fall in wages affect hours worked; and finally the conflicts which exist between a firm's desire to maximize profits and its ethical obligations. Included are some real-world situations.

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