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ECO 324
Professor Oettinger
Unique #34435
Spring 2011
Midterm 1
1.
Joe College gets utility from weekly goods consumption,
C
, and weekly leisure
time,
L
.
Joe’s parents give him $180 per week to help with living expenses.
Joe
has 90 hours per week that he can allocate between market work and leisure.
If
Joe works, he can earn a wage of $8 per hour.
a.
(4 points) Find an algebraic equation for Joe’s budget constraint.
Graph
the budget constraint, and indicate its slope and intercepts.
b.
(4 points) Suppose Joe’s marginal rate of substitution function (which is
determined by his preferences) is
L
C
MRS
CL
2
−
=
.
Find Joe’s reservation
wage (i.e., the smallest wage that will induce Joe to start working).
c.
(6 points) Find Joe’s utilitymaximizing bundle of
C
and
L
, and then
deduce his optimal weekly hours of market work.
(Hint: Use the two
conditions that define the budget lineindifference curve tangency.)
Illustrate the solution using a budget lineindifference curve diagram.
d.
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 Spring '11
 Oettinger
 Utility

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