ProblemSet4-AK - Economics 3203 Fall 2010 Problem Set # 4:...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Economics 3203 – Fall 2010 Problem Set # 4: Labor Supply (1) ANSWER KEY 1. The hairdresser could be making a reasonable decision. The income effect encouraged her to consume less leisure (work more) each time she had a wage decrease. However, the substitution effect encouraged her to substitute toward leisure as it got relatively less expensive (work less). When she got her first wage cut, the income effect dominated; when she got her second cut the substitution effect dominated. This creates a backward-bending labor supply curve. 2. C a. 672 U 1 = 6400 128 168 H Expression for Budget Line: C = 4*(168 – H) , or C = 672 – 4 H b. |MRS| = MU H /MU C = C / (H-88) We need to set |MRS| = W, so we have 4 = C / (H-88) Plug in C from budget line: 4 = [4*(168 – H)] / (H-88) Solve: 4H – 352 = 672 – 4H ---> H = 128 hours of leisure is optimal This means C = 4*40 = $160 and then u = 6400. c
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 06/07/2011 for the course ECP 3202 taught by Professor Hamersma during the Fall '10 term at University of Florida.

Page1 / 2

ProblemSet4-AK - Economics 3203 Fall 2010 Problem Set # 4:...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online