Question

1. Jacob and Ellen are students at the University of Alberta, and also work part-time at A&W. Jacob works 6 hours a week and Ellen works 8 hours a week. Suppose wages at A&W rise by 20 percent so that both Jacob and Ellen earn 20 percent more for each hour they work. After the wage increases, Jacob decides to work 5 hours a week and Ellen decides to work 10 hours a week. The manager at A&W thinks Ellen is being wise while Jacob is being foolish regarding the hours they work. a. Explain why it is possible, using the economic theory we have covered, that Jacob and Ellen are both making wise decisions with respect to how many hours they work. b. Next, explain why it is possible that Ellen is being foolish and Jacob is being wise. (Think outside the box.)

Answer 1

ser to be the theore- letsuse Thay. Jacob o s ard Elion works has a week. She tot wag fave been breased by 20 pollent. N o, oceb des de to work & Shauss a week and Ellen docices to woon to hours a week. Trete a tote of Income and Rusfordion Ouest have. how with Pllon her substitution effect aduerarese Income Gleet wich makes her to work mae. So she popis to wook more as her opportuning Cost Es highet. with Jacob he prefers to work less as he values Leisure more, with the increase of wages, he will be Edering same money but with less hours a week, so bcos is not worse off as far as concerned. (6) Now with Ellen working more one could say that she is terg foolish, as with people when their wages increases they preja to enjoy more leisure and do less work, she doesn't Value lisule more. As far as facob he is better off because with less hours he is still Earring the same money and Enjoys leisure at great revel. So as an employee he es better off.