MICROECONOMICS Solutions to Problem Set 3 1. (Labour Supply) A worker derives utility from consumption (that is, goods per day), denoted by Y, and leisure, denoted by L: U = U (Y, L) and faces the "bud- get" constraint Y = w (24 - L) (NB: In contrast to the lecture handout, initially the worker has no nonlabour income.) (a) Is w "real" or "nominal" wage?

MICROECONOMICS Solutions to Problem Set 3 1. (Labour Supply) A worker derives utility from consumption (that is, goods per day), denoted by Y, and leisure, denoted by L: U = U (Y, L) and faces the "bud- get" constraint Y = w (24 - L) (NB: In contrast to the lecture handout, initially the worker has no nonlabour income.) (a) Is w "real" or "nominal" wage?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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[Nonlinear Budget Constraints] Suppose that Simone has preferences that are represented by the utility function U(x, y) = V(xy), and she has an income I = 20. (a) Suppose that px = 1 and py = 2. What is Simone's MRSX,y? What is her optimal bundle? %3D (b) Suppose now that Simone is subject to rationing. What is her optimal bundle when the maximum amount of x she can purchase is 15? When it's 10? When it's 5? (c) Suppose that the store where Simone does her shopping has a sale going on, where the x is half-off, up to 4 units. Algebraically, px = 0.5 for x 4. That is, the price per unit, up to four units of x is 1, but then increases to 2. The price of good y is py = 2. What is her new optimal bundle? (Note: it may be helpful to plot the budget set. What are the possibilities for what a solution would look like for this budget set?)
Refer to the following diagram. Point A is 24 hours, C is 14 hours, D is 8 hours, and E is 6 hours. Income B₂ 0 D -Leisure If the current wage rate results in a budget constraint of AB2, how many hours will the individual work?
(a) Carlos has 168 hours per week to divide between labour and leisure. For his job, Carlos is allowed to work up to 60 hours a week earning a wage of $25, but faces a payroll tax of 20%. Given these constraints, Carlos chooses to work 40 hours per week. Graph the budget constraint and indicate the optimal choice, make sure to label all important points. (b) The government proposes a universal basic income whereby everyone is given $200 a week, which is financed by increasing the payroll tax to 40%. Add this new budget constraint to your diagram from (a). Be sure to show all your work/calculations, and label all important points. Is this likely to increase or decrease labour supply for Carlos? Carefully explain. (It is important that you carefully draw your diagram for this question, and compare it to the one in (a)).
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The MRS (marginal rate of substitution) is the slope of_ indifference curve; C: consumption curve). (A: production possibility curve; B:
Suppose U = 2X + Y, I = 20, Px = 2, and Py = 2. (a) Find Marshallian demand for X and Y . (b) What is Marshallian demand for X and Y if the price of X increases to 5? How much of the change in demand for X is the income effect and how much is the substitution effect? (c) How much is compensating variation for the price change described in part (b)? (d) How much is equivalent variation for the price change described in part (b)? ( Please solve all the subparts ASAP I will give you thumbs up . )
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It is proven mathematically that indifference curves are convex due to:(a) rising marginal rates of substitution.(b) the inverse association between the quantity demanded and the price.(c) costs decreasing in value.(d) the marginal rates of substitution being negative.
Follow up question g. Explain why the utility curves cannot be drawn so as to induce the worker to work between L1 and L2 hours. h Yelowitz (1995) studies a Medicaid reform measure that reduced the Medicaid work disincentive. One of the reforms he studied raised the Medicaid eligibility threshold income level by 33%. Draw a new version of the fifigure with a new labor–income curve that reflflects this change. Explain how this change might induce someone currently working L1 hours per year to work more, and be sure to draw indifffference curves to support your answer.
Assuming we have a choice where we work and how many hours we want to work, what determines the number of hours we will work? Marginal changes in our opportunity cost (utility) of leisure as income increases (the substitution effect) Marginal changes in the utility of our income as total income changes (the income effect) It is based on how much money we need to meet our basic needs A combination of A and B
Q1: Suppose Labor and Capital are substitutes and the price of capital falls. All else equal, we should expect the labor select (supply, demand) Curve shift select ( up to the right, down to the left ) and for equilibrium wages to select (rise, fall) Q2: An individual has a utility function over Leisure and Income such that ?=?1/2?1/2 This individual has a budget constraint ?=?⋅(24−?)+? The best possible wage this individual can earn in the labor market is $2 per hour. This individual is $30 in debt (they have negative non-labor income). If this individual is earning a utility level of 4, which of the following are true? Group of answer choices The worker could be supplying 1 unit of Labor The worker could be earning $10 The worker could be supplying 8 units of labor The worker is maximizing their utility given their budget The worker's Marginal Rate of Substitution at the point where the budget constraint intersects the indifference curve is equal to -2
QUESTION 7: Budget constraints Everyone is endowed with 168 hours in a week (24X7). If you work 40 hours or less, you w=$20 per hour. If you work overtime, you earn w-$25. Assume the worker has M= non-labor income and that the price of the consumption good is p. Draw the budget constraint. Label the intercepts and the slopes in both the overtime and non-overtime region.