1. The state of Alaska receives enormous revenues from the oil that is extracted from its lands. The state government uses some of these revenues to pay an annual "dividend" to every man, woman, and child who has resided in Alaska for at least the past 12 months. In a given year, the size of the payment is exactly the same for every Alaska resident. In 2016, based on the formula used to calculate this dividend in past years, each Alaska resident expected to receive a payment of about $2,000. In a surprise move, however, the governor reduced the 2016 payment to $1,000 per person.

Assume that consumption and leisure are normal goods. According to labor supply theory, how will this unexpected reduction in the size of the 2016 dividend payment affect the labor force participation rate of Alaskans?

A. The labor force participation rate will increase because of a substitution effect.

B. The labor force participation rate will increase because of an income effect.

C. The labor force participation rate will increase because of substitution and income effects that reinforce each other.

D. The labor force participation rate will decrease.

E. The change in the labor force participation rate is indeterminate because of conflicting substitution and income effects.

2. (Continuing with the situation described in the preceding question.) The state of Alaska receives enormous revenues from the oil that is extracted from its lands. The state government uses some of these revenues to pay an annual "dividend" to every man, woman, and child who has resided in Alaska for at least the past 12 months. In a given year, the size of the payment is exactly the same for every Alaska resident. In 2016, based on the formula used to calculate this dividend in past years, each Alaska resident expected to receive a payment of about $2,000. In a surprise move, however, the governor reduced the 2016 payment to $1,000 per person.

Assume that consumption and leisure are normal goods. According to labor supply theory, how will this unexpected reduction in the size of the 2016 dividend payment affect weekly hours of work by those Alaskans who were already working when the payment is reduced?

A. Weekly hours of work will increase because of a substitution effect.

B. Weekly hours of work will increase because of an income effect.

C. Weekly hours of work will increase because of substitution and income effects that reinforce each other.

D. Weekly hours of work will decrease.

E. The change in weekly hours of work is indeterminate because of conflicting substitution and income effects.