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Econ 101
Javier Birchenall
Due date:
Tuesday, October 13, 2009
Problem set 2: Labor supply and European vacation
The following problem set will acquaint you with some basic optimization analysis for the labor market, and
second, it will make you familiar with an important discussion in macroeconomics, the role of government
taxes in labor supply. Plan to spend 8 hours (maybe more) on these questions. Please return the problem
set on time (next Tuesday during class), remember you have the chance to miss one and only one, use it
wisely. If you have any problems regarding the questions please contact your TA immediately. Good luck!
Please remember to show your work and write your section.
I. The labor supply I (35%)
This problem considers the decisions of a consumer whose preferences are given by:
u
(
C, l
)=
C
+
l
γ
γ
,
in which
C
is the quantity of consumption and
l
is the quantity of leisure. The consumer faces two constraints.
The time constraint is given by
l
+
N
s
=1
with
N
s
as the time spent working (or the labor supply). Notice
that we have assumed
h
=1
without loss of generality. We have also assumed that
γ<
1
.T
h
em
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 Fall '08
 DUMBASS

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