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Econ 339 - Econ 339 Fall Quarter 2009 Problem Set 1...

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Econ 339 Fall Quarter 2009 Problem Set 1 - Solutions Solve the following Problems. Show your work. 1. Book Problems (p. 66): 2-1 2-1. How many hours will a person allocate to leisure activities if her indifference curves between consumption and goods are concave to the origin? A worker will either work all available time or will not work at all. As drawn in Figure A, point B is preferred to points A and C . Thus, the worker chooses not to enter the labor market. As drawn in Figure B, point C is preferred to both points A and B . Thus, the worker chooses not to consume any leisure and to work all available time. Figure A Figure B U 1 C B A A U 0 U 0 U 1 C B Goods Goods Hours of Leisure Hours of Leisure 2. Read chapter one in the book and answer the following questions: a. Why do we need theoretical models? Theoretical models allow us to a) organize our thought b) derive testable predictions that are founded on economic principles. In a world without theory we would have to rely on common sense which is often not the guide. b. Why is it (usually) easier to answer positive rather than normative questions? Give an example. It is easy to test whether EITC has an effect on labor supply theoretically and empirically. It is not easy to come up with an answer to “Should we have EITC?”
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