Economics 151a
Spring 2008
Homework 1
22. What is the effect of an increase in the price of market goods on a worker’s
reservation wage, probability of entering the labor force, and hours of work?
24. Tom earns $15 per hour for up to 40 hours of work each week. He is paid $30 per
hour for every hour in excess of 40. Tom faces a 20 percent tax rate and pays $4 per hour
in child care expenses for each hour he works. Tom receives $80 in child support
payments each week. There are 168 hours in the week. Graph Tom’s weekly budget line.
25. Cindy gains utility from consumption
C
and leisure
L
. The most leisure she can
consume in any given week is 168 hours. Her utility function is
U(C,L) = C
×
L
. This
functional form implies that Cindy’s marginal rate of substitution is
C / L
. Cindy receives
$630 each week from her greatgrandmother – regardless of how much Cindy works.
What is Cindy’s reservation wage?
28. Shelly’s preferences for consumption and leisure can be expressed as
U(C,L) = ( C – 200 )
×
( L – 80 ).
This utility function implies that Shelly’s marginal utility of leisure is
C – 200
and her
marginal utility of consumption is
L – 80
. There are 168 hours in the week available to
split between work and leisure. Shelly earns $5 per hour after taxes. She also receives
$320 worth of welfare benefits each week regardless of how much she works.
(a) Graph Shelly’s budget line.
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 Spring '06
 Miller
 Economics, Marginal rate, Shelly, reservation wage, L. Cindy

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