SIMON FRASER ECON290 Tut10 - any assets and therefore he...

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Economics 290: Canadian Microeconomic Policy Tutorial #10 1. Comprehensive Income Wallace the worker had the following cash flow last year. Cash inflow: Labor earnings $50,000, interest income $1,000. Cash outflow: Consumption spending $40,000. Moving expense $2,000 (Wallace accepted a job offer, and moved from east Canada to west). He held some stocks. The value of the stocks at the beginning of last year was $20,000, and it was worth $18,000 at the end the year. (a) Calculate Wallace’s comprehensive income from the sources side. (b) Calculate Wallace’s comprehensive income from the uses side. 2. Work-leisure Choice Wallace the worker has 16 hours a day. He can allocated the time between work (h) and leisure (L). The hourly wage rate is w . Wallace’s preferences over leisure and money income can be represented by utility function U(L, M). Wallace does not hold
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Unformatted text preview: any assets, and therefore he has no other income. (a) Write down Wallace’s budget constraint. Graphically show Wallace’s optimal choice of work and leisure. (b) Now suppose that the government imposes a wage tax of t. But the government does not want Wallace to be made worse off. Graphically show the amount of lump-sum subsidy needed in order to make Wallace as well off as before the wage tax. 3. Substitution and Income Effects If the market supply of labor is perfectly inelastic, indicate whether each of the following statement is true or false. Explain your answer. (a) The substitution effect of wage changes is zero. (b) The income effect of wage changes is zero. (c) The total effect of wage changes is zero. (d) The income effect of wage changes exactly offsets the substitution effect....
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