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y 1. Disequilibrium point: Underemployment l MRS Slope of BC = w Underemployment: worker would increase utility (higher IC) by working longer hours (from A to B) l0l0 l1l1 lC 0 lC 1 A B Equilibrium y0y0 y1y1

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y 2. More or fewer working hours? l a) Wages go up and the substitution effect is greater than the income effect more hours (upward sloping portion of L s ) l0l0 l1l1 y0y0 y1y1 A B

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y 2. More or fewer working hours? l b) Wages go down and the substitution effect is smaller than the income effect more hours (backward bending portion of L s ) l1l1 l0l0 y0y0 y1y1 B A

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y 2. More or fewer working hours? l c) Wages go down and the substitution effect is greater than the income effect fewer hours (upward sloping portion of L s ) l1l1 l0l0 y0y0 y1y1 B A

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y 2. More or fewer working hours? l d) Wages go up and the substitution effect is smaller than the income effect fewer hours (backward bending portion of L s ) l0l0 l1l1 y0y0 y1y1 A B

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y What’s wrong with this figure? l

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y 3. IC-BC setting and the supply curve l Wages go up and the substitution effect is greater than the income effect more hours (upward sloping portion of L s ) l0l0 l1l1 y0y0 y1y1 A B L w A B w0w0 w1w1 L1L1 L0L0 LsLs

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© 2008 Pearson Addison Wesley. All rights reserved Chapter Five Consumer Welfare and Policy Analysis.

© 2008 Pearson Addison Wesley. All rights reserved Chapter Five Consumer Welfare and Policy Analysis.

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