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Peregrinus Peregrinus
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6 years ago
Consider two workers–Averil and Taylor.  They both earn the same wage rate and neither has any non-labor income.  Averil chooses to work 40 hours per week and Taylor chooses to work 10 hours per week.  Due to improving macroeconomic conditions both workers experience an exogenous 10% increase in their common wage rate.  Explain which worker is likely to have a larger income effect as a result of the wage increase.  Illustrate with the appropriate graph.
Textbook 
Modern Labor Economics: Theory and Public Policy

Modern Labor Economics: Theory and Public Policy


Edition: 12th
Authors:
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6 years ago
The relevant figure in the text is Figure 6.11.  A wage change changes both purchasing power and the opportunity cost of leisure time.  The income effect relates to the first phenomenon.  Suppose both Averil and Taylor experience an increase in wage of a dollar per hour.  Then Averil earns an additional $40 per week given her current work schedule.  Taylor who gets the same wage increase only gets an extra $10 per week in income on her current work schedule.  Though the wage has changed by the same degree for both workers, it confers a much larger change in purchasing power to the worker that works more hours in the first place and therefore the income effect of the wage change will be larger for Averil and smaller for Taylor.
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