Why an increase in lump sum transfer will reduce amount

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Reference no: EM13243658

Suppose labor supply function:

NS = 85 + 10w - T

where w = real wage and T = lump sum transfer to individuals in theeconomy.

a) Graph relationship between labor supply and real wage for agiven level of T. (This is the function for a straight line, so itwould be a straight line representing NS?)

b) Consider an increase in the lump sum transfer T. Use theconcepts of income and substitution effects to explain why anincrease in the lump sum transfer will reduce the amount of labor supplied.

Reference no: EM13243658

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