Question

for each scenario, decide whether the income effect or the substitution effect dominates for each individual's labor supply decision. a. edmond works at a restaurant and on some days is a shift manager and on other days is a server. he makes more money as a server. after the restaurant tells him they only need him to work as a shift manager, he asks to have his hours increased. b. veronica is a graphic designer at a small, struggling business. managers decide to reduce her wage and she decides to work fewer hours. c. vlad delivers pizzas and decides to reduce his hours after the company increases his wage. d. after ashley, a security guard, is given a raise, she decides to work more hours

Answer 1

In scenario a, the income effect dominates. In scenario b and c, the substitution effect dominates. In scenario d, the substitution effect dominates.

Step-by-step explanation:

For scenario a, the income effect dominates as Edmond asks for more hours after being told he can only work as a shift manager. This is because his income has decreased due to the change in job position, and he seeks to compensate for the loss.

For scenario b, the substitution effect dominates as Veronica decides to work fewer hours after her wage is reduced. With the lower wage, leisure becomes relatively more expensive compared to income, leading her to choose less leisure.

For scenario c, the substitution effect dominates as Vlad decides to reduce his hours after his wage is increased. With the higher wage, income becomes relatively cheaper compared to leisure, leading him to choose less leisure.

For scenario d, the substitution effect dominates as Ashley decides to work more hours after receiving a raise. With the higher wage, leisure becomes relatively more expensive compared to income, leading her to choose less leisure and work more hours.

Answer 2

The labor supply decisions of Edmond and Ashley are primarily influenced by the substitution effect, while the decisions of Veronica and Vlad are largely guided by the income effect, as determined by changes in wages and their impacts on the perception between earning income and having leisure time.

Step-by-step explanation:

For each scenario, we need to assess whether the income effect or the substitution effect dominates the individual's labor supply decision.

• Edmond: His shift to asking for more hours as a shift manager, despite earning less than as a server, suggests that the substitution effect dominates since he needs to work more hours to maintain his income.
• Veronica: After her wage is reduced, she decides to work fewer hours. This indicates that the income effect is stronger, as the reduced income leads her to value leisure more.
• Vlad: Reducing working hours after a wage increase implies that the income effect dominates; he can afford the same or a higher level of income with less work, so he prefers more leisure.
• Ashley: Deciding to work more hours after receiving a raise could be driven by the substitution effect, as earning additional income has become relatively less costly compared to leisure.

In each of these scenarios, the individuals' decisions about labor supply are influenced by changes in their wages and how they perceive the trade-offs between earning income and enjoying leisure. These trade-offs are dictated by the comparative strength of the income and substitution effects, which can have different impacts on different individuals.