3.7 QuestionsYou are offered a job in which you can choose any hours you want. You wih bpaid 13 dollars per hour.1. Draw a large (half a sheet of lined paper) budget constraint (feasible set) withincome on the y-axis and free time per day on the x-axis. Label the x and yintercepts. Draw the optimal point on your budget constraint at 10 hours of workwith an indifference curve passing through it.2. Draw the effect of a wage increase from 13 to 18 dollars per hour. Label thenew y intercept.3. Draw the effect of social security payment of $30 per day with a wage of $13per hour.4. What is the equation of your budget constraint in question 3?5. If your wage doubles from 12 to 24 dollars per hour, what can we can concludeabout your opportunity cost of free time?6. How does the substitution effect change your choice of free time and why?7. How does the income effect change your choice of free time and why?QUESTION 8 CHOOSE THE CORRECT ANSWER(S)Figure 3.15 depicts your budget constraint when the hourly wage is$15.Which of the following is (are) true?E A) The slope of the budget constraint is the negative of the wage rate (-15).B) The budget constraint is a feasible frontier with a constant marginal rateof transformation.C) An increase in the wage rate would cause a parallel upward shift in thebudget constraint.I D) A gift of $60 would make the budget constraint steeper, with theintercept on the vertical axis increasing to $300. While considering this decision, you receive an email. A mysteriousbenefactor would like to give you an income of $50 a day-for life (all youhave to do is provide your banking details.) You realize at once that this willaffect your choice of job. The new situation is shown in Figure 3.17: foreach level of free time, your total income (earnings plus the mystery gift) is$50 higher than before. So the budget constraint is shifted upwards by$50-the feasible set has expanded. Your budget constraint is now:c = 15(24 - t) + 50300IC,225150758.1012141618202224Hours of free timeHours of work246810121416Free time, t2422201816141210Consumption, c0 $30 $60 $90$120$150 $180$210$240The equation of the budget constraint is c = w(24 - t)The wage is w = $15, so the budget constraint is c = 15(24 – t)Figure 3.15 Your preferred choice of free time and consumption.4. Your ideal job2. The slope of the budget constraintThe slope of the budget constraint isnstraintYour indifference curves show that yours your budget con-ne maximum amountpu can have for eachideal job would be at point A, with 18equal to the wage, $15 (in absolutevalue). This is your MRT (the rate athours of free time and daily earnings ofwhich you can transform time into con-$90. At this point your MRS is equal tosumption), and it is also the opportunitycost of free time.the slope of the budget constraint,which is the wage ($15).3. The feasible setThe budget constraint is your feasiblefrontier, and the area below it is thefeasible set.Consumption ($)

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QUESTION 8 CHOOSE THE CORRECT ANSWER(S) Figure 3.15 depicts your budget constraint when the hourly wage is $15. Which of the following is (are) true? E A) The slope of the budget constraint is the negative of the wage rate (–15). C B) The budget constraint is a feasible frontier with a constant marginal rate of transformation. C) An increase in the wage rate would cause a parallel upward shift in the budget constraint. I D) A gift of $60 would make the budget constraint steeper, with the intercept on the vertical axis increasing to $300.

QUESTION 8 CHOOSE THE CORRECT ANSWER(S) Figure 3.15 depicts your budget constraint when the hourly wage is $15. Which of the following is (are) true? E A) The slope of the budget constraint is the negative of the wage rate (–15). C B) The budget constraint is a feasible frontier with a constant marginal rate of transformation. C) An increase in the wage rate would cause a parallel upward shift in the budget constraint. I D) A gift of $60 would make the budget constraint steeper, with the intercept on the vertical axis increasing to $300.

ENGR.ECONOMIC ANALYSIS

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Chapter1: Making Economics Decisions

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