Contemporary Labor Economics
11th Edition
ISBN: 9781259290602
Author: Campbell R. McConnell, Stanley L. Brue, David Macpherson
Publisher: McGraw-Hill Education
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Question
Chapter 2, Problem 6QS
To determine
The impact of labor supply when imposing lump-sum tax and proportional tax.
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Winona has 80 hours to divide between leisure and labor. Her utility function is u(r,c) = f(r) + c, when r represents hours of leisure,c represents dollars of consumption, and f is strictly concave. Winona’s wage is w0= $15/hr. initially, then it rises to w1= $20/hr.
(i) Explain what happens to Winona’s labor supply when the wage rises,and why.
(ii) Explain how the answer to (i) would change if Winona were to win a lottery.
A worker has no non-labor income and is earning $14/hour. He maximizes utility by working 40 hours per week. Begin by drawing a graph that illustrates this to be the utility-maximizing solution.
The same worker loses his job. He is entitled to unemployment compensation that will pay up to 50% of his weekly earnings. The worker has an opportunity to supplement his unemployment compensation by taking a job that pays $7/hour.
Using the same graph, show the worker's new budget line and his utility-maximizing decision as whether to work the new job and how many hours to work. Make sure your graph shows the relevant budget lines and indifference curves.
Mark 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.
Chapter 2 Solutions
Contemporary Labor Economics
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- True or False. Explain why. Deniz’s preferences for consumption and leisure is as follows:U(C,L)=C2LDeniz has 100 hours in the week available to split between work and leisure. She earns $10 per hour after taxes. She also receives $260 worth of welfare benefits each week. Deniz’s optimal amount of leisure time will be 45 whereas labour supply will be 55.arrow_forwardConsider an economy in which every person’s utility function takes the form Here, c is consumption and h is hours of work. The parameter θ varies across individuals. Within the economy, θ is uniformly distributed on the unit interval. Each unit of consumption goods costs $1, and the wage rate is $2. a) Assume that there are no taxes or subsidies within the economy. How much work does a person of any type θ do? What is his consumption and what is his utility? If a lump-sum tax were imposed upon him, or a lump-sum subsidy given to him, how would that tax or subsidy affect his hours of work, consumption and utility? b) People with low values of θ find work difficult. (A low θ might be interpreted as a physical disability which hampers a person’s ability to earn an income.) Suppose that the government decides to assist the people for whom θ is less than 1/4. Unfortunately, it cannot directly observe each person’s θ, so it instead…arrow_forwardAn individual values both consumption and leisure. Suppose the individual has 1600 hours per week they can allocate between leisure and work. IF the individual works, they make a wage of $25 per hour. The individual's utility function is given as a function of leisure time, L and consumption, c: U(L, c) = L^(1/2)c ^ (1/2) a) Draw the individual's budget constraint for leisure and consumption. b) How much leisure time will the individual have when utility maximizing? c) Consider a Universal Basic Income policy like the one proposed by Andrew Yang that would give all individuals a lump -sum, unconditional cash transfer of $1,000 each month. How much leisure time will the individual have when utility maximizing with the cash transfer? d) Now suppose, instead of a cash transfer, a minimum wage of $40 per hour is implemented. How much leisure time will the individual have when utility maximizing with the cash transfer? e) What change in leisure time can be attributed to the substitution…arrow_forward
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