150a_test1_key - Econ 150a Labor Economics Practice test...

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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 a-e 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 a-d. 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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3 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, college-educated 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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150a_test1_key - Econ 150a Labor Economics Practice test...

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