Econ 150a
Labor Economics
Practice test for Ch 1, 2, and 9.
Suggested solutions
1.
Phillip receives EITC. If he earns less than 10,000 per year the government
subsidizes his wages by 40% (or 0.4). If he earns between $10,000 and $12,000
there is no tax. If he earns greater than $12,000 he is taxed 21.06% (or 0.2106).
His market wages are $10 per hour. He has 5,000 hours per year to devote to labor
or leisure. Show all answers from ae graphically on the same graph.
a. Assuming no subsidy and U(C,L) = CL, find Phillip’s utility maximizing
combination of leisure and labor.
He is maximizing at L=2,500 and H=2,500
b.
Find the maximum value of the subsidy.
Notice 0.4, so if he earns $1, the government subsidizes him by $0.40. If he
earns less than $10,000 he gets $0.40 per dollar earned
1.4*10,000=$14,000 thus if he earns $10,000, he will get a subsidy of
$14,000$10,000=$4,000
Other accepted answer is $1,270 (from part e)
b.
Find the range of work hours where his wage is $10 and he receives the
full subsidy. (Find the points where no subsidy is earned to the point
where the subsidy is taxed).
Between 1,000 and 1,200
c.
Find the maximum work hours where the subsidy goes to zero.
Total hours are 3,099.34
d.
Now assume he is eligible for the subsidy. Find his utility maximizing
labor and leisure choice.
I've decided to drop this since it won't be on your midterm/final. I don't want
anyone wasting study time on this since it
won't be tested.
e.
On one graph, clearly label all your answers from parts ad.
Slope = 10
Slope = 7.894
Slope = 10
Slope = 14
4
3
2
1
1 to 2 is H=1000
2 to 3 is H=200
3 to 4 is H=1899
Total hours = 3099
Leisure
30990
16000
14000
Total
income
26270
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View Full Document3 to 4 is from 4000/10*.2106=1899.34 which is how many hours it takes
for the subsidy to hit zero once earned income >=12,000
2.
Among single, collegeeducated women aged 22 – 25, average annual hours
worked is 2,160 and the average wage is $22.50. If the average wage increases to
$25 per hour, average annual hours worked increases to 2,340. What is the
elasticity of labor supply for this group of workers?
Use percent change formula (would have been covered in econ 1 or high school
math class). The elasticity of labor supply is
75
.
0
9
1
12
1
50
.
22
50
.
22
00
.
25
160
,
2
160
,
2
340
,
2
%
%
=
=


=
∆
∆
=
w
L
S
σ
3.
Anna has utility function U(C, L) = C
2
L. She has 36 hours a week to allocate to
labor and leisure and is paid $10 per hour. She would like to work 24 hours a
week but her boss doesn’t have enough work for her so she works 20 hours a
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 Spring '09
 Economics, Supply And Demand, Jack household

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