mid1_spring11 - ECO 324 Unique #34435 Professor Oettinger...

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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 utility-maximizing bundle of C and L , and then deduce his optimal weekly hours of market work. (Hint: Use the two conditions that define the budget line-indifference curve tangency.) Illustrate the solution using a budget line-indifference curve diagram. d.
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mid1_spring11 - ECO 324 Unique #34435 Professor Oettinger...

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