Deborah has 80 hours per week available for work and leisure. Her current
wage rate is $25 per hour. Deborah has $400 of rental income every week.
a) Construct a proper diagram to describe Deborah’s choice of working 40 hours per
week. Calculate Deborah’s maximum possible income and optimal income, and show
them in the diagram.
b) Suppose Deborah recently moved into her boyfriend’s place. She shares the
household expenses and is “taxed” 50% of her wage income. Draw another diagram
to compare Deborah’s choice in Part a) and a new labor supply decision of working
50 hours per week due to the “tax”. Clearly label out the income effect, substitution
effect and total effect in the diagram.
Question Two
Samantha has an annual non-labour income of $5000. Suppose she has the
total available time of 4160 hours per year. Samantha's wage rate is $15 per hour, and she
chooses to work 2000 hours in a year. Suppose when Samantha's wage rate increases from
$15 to $18 per hour, she will work 2040 hours. At $18 per hour, if she works 2200 hours per
year, she would be indifferent to her original work decision before the wage increase.
a) Draw a diagram to show all the given information related to Samantha's work
circumstances. Calculate all the relevant income levels and label them in the graph.
b) Calculate Samantha's income effect, substitution effect and total effect related to the
wage increase. Show them in the diagram.
Trending nowThis is a popular solution!
Step by stepSolved in 5 steps with 5 images
- 23. A worker has utility over consumption c and leisure I given by U(c,1) = a 6-6 + 18 where 0 << 1 She has T hours to allocate between leisure and work. For each hour she works, she earns a wage of w to spend on consumption c. The price of c is 1. She also receives an additional 'non-labor income' m regardless of how much she works. She maximizes utility subject to the following constraints: contact@cloure.m Assume interior solution, then cw(T-1) +m C≥O 0≤1≤T A. c is normal and I is inferior good. B. c is inferior and I is inferior good. C. c is inferior and I is normal good. D. c is normal and I is normal good. Page 8arrow_forwardThe utility of Amanda for leisure (L) and income (Y) is U = LY. The price of income is 1. If Amanda uses her spare L hours a day, (24 - L) hours will be labored. Since wages are w, the daily income is (24 - L). If the wages are positive, show that the optimal number of leisure hours that Amanda will use will always be the same. How much leisure time does Amanda demand and how much work time do she want to provide?arrow_forwardJones, without a job or job prospects, has been on social assistance for the past four months. Social assistance pays a basic benefit of $600 a month with a benefit reduction rate of 75 percent for earned income. Her welfare benefit is given as B = 600 - 0.75E, where E represents monthly earnings. Jones has just been offered a part-time job working 5 hours a day, 5 days a week, earning an hourly wage of $11. Sketch a budget constraint for Jones given the social assistance scheme in place and the wage rate available for part time work. How much income would she earn if she accepted the job? Would Jones still be on social assistance if she took the job? Draw the budget constraint.arrow_forward
- Explain in detail Discuss the possible substitution effect and the income effect of an increase in income on leisure time.arrow_forwardjust subparts g and harrow_forwardMark can work up to 80 hours each week at a pre-tax hourly wage of $20 but faces a constant 20 percent tax on his earnings. Thus, Mark maximizes his utility by choosing to work 50 hours per week. The government proposes a negative income tax whereby everyone is given $300 per week and anyone can supplement their income further by working. To pay for the negative income tax, tax on earnings will be increased to 50 percent. On a single graph, draw Mark's original budget line and his budget line under the negative income tax. Show that Mark will work fewer hours if the negative income tax is implemented Will Mark's utility be greater under the negative income tax? Discuss your answer.arrow_forward
- Principles of Economics (12th Edition)EconomicsISBN:9780134078779Author:Karl E. Case, Ray C. Fair, Sharon E. OsterPublisher:PEARSONEngineering Economy (17th Edition)EconomicsISBN:9780134870069Author:William G. Sullivan, Elin M. Wicks, C. Patrick KoellingPublisher:PEARSON
- Principles of Economics (MindTap Course List)EconomicsISBN:9781305585126Author:N. Gregory MankiwPublisher:Cengage LearningManagerial Economics: A Problem Solving ApproachEconomicsISBN:9781337106665Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike ShorPublisher:Cengage LearningManagerial Economics & Business Strategy (Mcgraw-...EconomicsISBN:9781259290619Author:Michael Baye, Jeff PrincePublisher:McGraw-Hill Education