Wage rates

CFA Level I
#1

At low wage rates, will an increase in the wage rate most likely result in: the substitution effect? an increase in the supply of labor? A NO NO B No YES C YES NO D YES YES

#2

b?

#3

B

#4

florinpop – can you please send me an email at cpkrish@yahoo.com? Thanks CP

#5

I put B too…but answer is D At low wage rates, an increase in the wage rate will induce a worker to work longer hours, leading to the substitution effect and increase in quantity of labor supplied. florinpop, I expected you to get this right since you just explained it so well in another post on elasticity of labor. anyhow my question is how do we know if the substitution effect in this question is referring to the employer point of view (ie substitute machines for labor) or from the laborer point of view (ie work longer hours).

#6

maybe the phrase “low wage rates” implies that that kind of job doesn’t require qualified workers - like warehouse employees versus machines i.e. ? Just a guess

#7

Long on cfa I just go on logic and it doesnt always work this is thought from the point of view of employee That’s why i was wrong. because I thought that employer would have incentive to substitue labour for machine at high wage rates. Apparently what they are talking about is trading leisure for work from the employee point of view. http://en.wikipedia.org/wiki/Consumer_theory

#8

substitution effect- that particular phrase- refers to the workers point of view in the CFA curriculum world. The term for the employers point of view is Substituitability of Capital for Labor, i.e., put in more robots for workers.

#9

oops, didn’t read your question well enough working longer hours (the laborer’s point of view) doesn’t mean substitution - that’s just increase of his output.

#10

Exactly. I got that one wrong, too. That’s the only way to learn this stuff.

#11

I got C… ‘Increase in supply’ kinda implies a shift in the supply curve… where as a ‘increase in QUANTITY supplied’ would indicate a move along the curve. If wages change, that shouldn’t cause the curve to shift.

#12

Exactly what i was thinking yickwong… How can wage change affect the supply curve… quantity supplied should change…