Question
Using the income-leisure framework, formally analyze the added worker effect; that is, the impact on the wife's labour supply of an adverse shock to her
Using the income-leisure framework, formally analyze the added worker effect; that is, the impact on the wife's labour supply of an adverse shock to her husband's job. For concreteness, assume that the wife has a wage rate of $10 per hour, and that her husband's employer has forced him to take a pay cut from $20 per hour to $15 per hour but allowed him to continue working at 40 hours per week (if he wishes). Consider the following two approaches:
a)In the first, take the husband's hours as given, and analyze the household choice over consumption and wife's leisure.
b) In the second, focus on the choice of husband versus wife's labour supply, allowing both to adjust their hours, and putting the consumption decision in the background.
c) Compare the pros and cons of the above two approaches. In particular, use the two approaches to compare the impact on the wife's labour supply of unemployment compensation for the husband equal to $200 per week.
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