Econ100A_PSET4 - Econ 100A Problem Set 4 Supply of Labor 1...

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Econ 100A - Problem Set 4 Supply of Labor 1. Let U(L e , I) = L e 2 I. What is the individual’s labor supply function (L a (w, I 0 ))? How many hours does the individual work if the wage (w) is 10$/hr and non-wage income (I 0 ) is 320$/wk? 2. Illustrate the income and substitution effects of a rise in a consumer’s wage, w, upon their labor supply. 3. Using one budget line and 1 indifference curve, illustrate a case in which an individual’s wage is such that the individual chooses not to work at all. 4. Your friends (some macroeconomists) have a theory that people’s utility functions U(L e , I) for leisure and disposable income might take the linear form, U(L e , I)=L e + I. Show that they are idiots. (Hint: Try drawing a picture and think about what this theory implies as wage rates get very high.) 5. Use budget lines and indifference curves to illustrate the case where a simultaneous doubling of the wage rate and a doubling of my non-wage income would have no effect on my labor supply.
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