Read the article “Even Europeans will Respond to Incentives” by Edward Prescott, a Nobel laureate in economics that appeared in the issue of the Wall Street Journal.

a) According to Prof. Prescott, between the early 70s and the mid 90s why did labor supply drop in Europe?

b) Use the concepts of substitution and income effect to discuss how taxes that lower net wages can lead to a reduction in the number of hours worked.

At a conference, Olivier Blanchard, a professor of economics at the MIT and the chief economist at the International Monetary Fund (IMF) until October 2015, showed that between 1909 and 1940 the hourly pay of the typical full time American worker more than doubled while the number of hours the typical full time American worker dropped from 70 a week to fewer than 45 a week. c) Use the concepts of substitution and income effect to discuss how higher net wages could lead to a reduction in the number of hours worked.