Assignment1 - 2-6 Shelly’s preferences for consumption...

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EC3361 Labor Economics Semester I, 209-2010 Assignment 1 (Due: 31st, Monday noon) On the first page of your answer, please indicate your tutorial group: DW1—DW12 Borjas (5 th edition) Questions 2.2, 2.4 and 2.6 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. 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?
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Unformatted text preview: 2-6. 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. (b) What is Shelly’s marginal rate of substitution when L = 100 and she is on her budget line? (c) What is Shelly’s reservation wage? (d) Find Shelly’s optimal amount of consumption and leisure....
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