151ahomework_1

# 151ahomework_1 - Economics 151a Spring 2008 Homework 1 2-2...

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Economics 151a Spring 2008 Homework 1 2-2. 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? 2-4. 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. 2-5. 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 great-grandmother – regardless of how much Cindy works. What is Cindy’s reservation wage? 2-8. 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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151ahomework_1 - Economics 151a Spring 2008 Homework 1 2-2...

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