P2 - ECO 310, Fall 2008 Problem Set 2: Consumer Theory Due...

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Unformatted text preview: ECO 310, Fall 2008 Problem Set 2: Consumer Theory Due in class on October 7 Question 1 You have just emerged from medical school with a debt service burden of $25,000 per year, and have set up practice. You have to decide how hard to work. For each hour of work, you expect to earn $50 (after subtracting expenses of maintaining your office, taxes, etc.). Your utility function for a full year is U ( I,H ) = ln I + 2ln(5000- H ) , where H is the number of hours you work during the year, and I is what is left of your annual income after expenses, taxes, and debt service. (a) What is your budget constraint linking I and H ? (b) Find your optimal number of hours of work. (c) If taxes go up so you are left with only $40 per hour of work, will you work more or fewer hours? Explain the economic intuition for the result. Question 2 There are two goods, whose quantities are denoted by x and y , each being a real number. An individuals consumption set consists of all ( x,y ) such that x and...
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P2 - ECO 310, Fall 2008 Problem Set 2: Consumer Theory Due...

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