Problem Set 4 - Solution

# Problem Set 4 - Solution - Econ 313-1 TA Tian Liang...

This preview shows pages 1–3. Sign up to view the full content.

Econ 313-1 TA: Tian Liang Solutions to Problem Set 4 1. R - leisure, x - consumption, w = 6 , R = 105 , p = 1 (a) Budget constraint: wR + px = w R 6 R + x = 630 (b) When the wage rate (i.e. the price of leisure) increases from \$6 to \$10, the substitution e/ect on leisure is negative. The income e/ect on leisure is positive, because (i) the employee is a seller of leisure; and (ii) leisure is a normal good. Therefore the total e/ect on leisure (and thus labor supply) is ambiguous. (c) When R > 65 , 6 R + x = 6 105 , i.e. 6 R + x = 630 . When R < 65 , 9 R + x = 6 40 + 9 65 , i.e. 9 R + x = 825 . 1

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
(d) If Joe is willing to substitute leisure for consumption, his hours of work will rise. He initially works 40 hours a week, so at ( R = 65 , x = 240 ) the MRS is equal to 6 and thus less than 9. Therefore it is optimal for him to consume less leisure and more consumption good with the overtime policy in place. Note that the bundle (
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 6

Problem Set 4 - Solution - Econ 313-1 TA Tian Liang...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online