1) Why does the choice between Income and Leisure determine the amount of Labor a consumer will supply in factor/resource markets?

2) Suppose a consumer's wage rate is $10 per hour.  Graph his Income/Time Constraint.

3) Which of the points in the figure below represents a consumer's optimal combination of Income and Leisure?

4) With respect to a consumer's labor supply decision, what is the Substitution Effect, and what is the Income Effect?

5) Draw a graph that shows the impact of a changing wage rate on a consumer's optimal combination of Income and Leisure.

6) If the Substitution Effect dominates a consumer's labor supply decision at low wage rates, but the Income Effect dominates the consumer's labor supply decision at high wage rates, use a graph to show the relationship between the wage rate and the amount of labor the consumer will supply in resource markets.

7) What is the name of the graph in question (6) above?

Multiple Choice

1) "The amount of labor plus the amount of leisure must add to 24 hours per day" is the ______________.   a) budget constraint, b) time constraint, c) income constraint, d) labor constraint.

2) To an economist, washing your dishes at home is classified as ____________, because it does not involve working for pay.  a) work, b) labor, c) leisure, d) heroism, at least for some of us.

3) The Labor Supply Curve is the relationship between: a) labor and leisure, b) labor and income, c) wage and labor, d) leisure and income.

4) "If wage increases, an hour of labor earns more money, so a consumer will want to labor more and leisure less." This is the __________ Effect of a wage increase. a) Leisure, b) Income, c) Substitution, d) Time.

5) If a company builds a factory in a foreign, poor country, it needs to be careful when it increases wages, because an increase in the wage rate may cause workers to supply less labor. This odd phenomenon may be explained by: a) the income effect dominating the substitution effect, b) the substitution effect dominating the income effect, c) an increase in the number of hours in the day, d) irrational behavior.