Problem Set 4 - Solution

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

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

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