Econ 150a
Labor Economics
Practice test for Ch 1, 2, and 9.
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.
b.
Find the maximum value of the subsidy.
c.
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).
d.
Find the maximum work hours where the subsidy goes to zero.
e.
Now assume he is eligible for the subsidy. Find his utility maximizing labor and
leisure choice.
f.
On one graph, clearly label all your answers from parts ae.
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? Hint, use percent change formula (would have been covered in
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview.
Sign up
to
access the rest of the document.
 Spring '09
 Economics, Phillip

Click to edit the document details