University of Illinois at Urbana-Champaign
Professor Kristine Brown, ECON 440, Fall 2011
1
Problem Set #1
Due in class Thursday, September 8
Total Points:
100 pts. (6 pts. to each lettered part of Q1, 8 pts. to each remaining lettered part).
Directions:
Please write/type your solutions neatly and staple multiple pages together.
Also be sure to
write your name clearly at the top of each page and the record the names of classmates (up to 2) that you
worked with.
1.
Indicate whether each statement is true or false, and support your answer with a 1-3 sentence
explanation. If part of a statement is false, then the whole statement is false.
a.
True or False
:
Decreasing the tax rate of a flat wage tax will guarantee that all individuals
will
work more hours.
False.
Decreasing the tax rate of a flat tax will look, to the individual, like a wage increase and an
outward rotation of the budget constraint.
[For example if the wage is $10/hr and the tax is
10%, the slope of the BC is -9, with a tax of 0% the slope is -10.]
For those that are working
positive hours, the substitution effect will push them to work more and the income effect
will push them to work less
the result is ambiguous.
We can be certain that those that
are working zero hours before the tax decrease with only experience the substitution effect.
This will push some to enter the labor market.
b.
True or False:
The unemployment rate will not change if a worker is laid off, and s/he decides to
retire early rather than looking for a new job.
False.
The unemployment rate is the number of workers that are unemployed (U) over the size of
the labor force (U+E).
If a worker that loses a job does not look for a new job, this worker
has exited the labor force.
In this case, U will not change, but U+E will decrease by 1.
2.
Iris can choose to work between 0 and 168 hours per week.
If she works part-time (less than 40
hours/week) she earns $10/hr.
Full-time jobs (40 hours or more per week) pay more - if she chooses
to work full-time, she earns $20/hr for all hours that she works.
Her weekly utility over consumption
and leisure is given as
ܷ ൌ ሺܥ 140ሻሺܮ െ 80ሻ
.
a.
Begin by drawing Iris’s
weekly
budget constraint representing total consumption versus hours of
leisure.
What is the equation for this budget constraint?
Slope = -20
Slope = -10
1680
3360
168
L (hours)
C ($)

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