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INTERMEDIATE MICROECONOMIC THEORY ECONOMICS 301 FALL 2010 PROFESSOR MULLIGAN SECOND HOMEWORK PROBLEM SET (DUE NO LATER THAN THE START OF CLASS ON THURSDAY, OCTOBER 28TH) 1. Assume that poor people who accept lump-sum transfer payments of $L must also agree to pay a tax on their wages of 50%. They do not pay a tax on the lump-sum payment. a. Use a labor-leisure choice analysis (Chapter 5) to show what effect the lump- sum payment and wage tax combination has on an eligible consumer’s budget constraint. b. Use your answer to the first part of this question to help explain why some individuals with the same wages and non-work income as others would not be willing to participate in this program. Hint: consumer preferences will play an important role in the decision to participate. Be explicit in showing why this is the case. 2. Assume that Ricky wins in the state lottery $500 a day for life. Use the analysis of the choice between labor and leisure to answer the following questions: a. Show how his lottery earnings affect the position of his budget line. b. Assume that Ricky continues to work the same number of hours per day after winning the lottery. Show on a graph the effect of the lottery winnings on his hours of leisure. Note: be sure to include indifference curves in addition to the new budget constraint. c.
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This note was uploaded on 02/20/2011 for the course ECON 301 taught by Professor Arnold during the Fall '08 term at University of Delaware.

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