Reference no: EM132586895

Income and substitution effects are critical in understanding the choice to supply labor. Consider Milton, who is currently working for pay. Each of the following situations involve a change in Milton's life that may impact his decision to supply labor. For each, (1) visualize the impact of the change with an indierence curve graph. (2) Tell me whether the change will cause Milton's labor supply to increase, decrease, remain unchanged, or whether the impact is uncertain. (3) Finally, tell me whether the change is due to an income effect, substitution effect, both, or neither. For this question, restrict yourself to thinking about Milton only having a choice of how much labor to supply at his current job (IE, he cannot quit and find a different job)

(a) Milton's rent unexpectedly increases by $200 per month.

(b) Due to a recession, Milton's hourly wage is reduced by $1.

(c) To make room for some new employees, Milton's boss needs to move his desk to the basement. The basement is dark and has an insect problem(hint: does Milton's budget line move?).

(d) Milton finds $300,000 when he leaves work one day.