ps_6 - a. Draw her budget constraint. b. Now suppose that...

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Problem set #7 Ec 201 Spring, 2009 Michigan State University L. Martin 1. Maxine, an elderly resident of Vermont, has $4,000 to spend over the winter. Her oil fired boiler consumers $1.00 per gallon oil at a frightening rate. a. Draw her budget constraint. b. She finds that she is eligible for the new fuel subsidy program, which pays one half of the bill for heating oil. Draw her budget constraint as modified by the program. c. Show the substitution and income effects of the program. 2. Show how the demand curve is derived from the budget constraint. (It’s in the text.) 3. (labor supply budget constraint) Recently blinded, Mai Lin can no longer perform her old job as an insurance actuary. She does have an offer to train temporary actuaries at a wage of $150 per day. She could work as much as 20 days per month. Finally, her lump sum disability payment equals $1,000
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Unformatted text preview: a. Draw her budget constraint. b. Now suppose that her lump sum payment is reduced dollar for dollar by an earnings she would make working. The means that her net wage is zero if she earns less than $1,000. Show how the new budget constraint would look. c. Will she work more or less in part b? Why? 4. Sam earns $50,000 currently. He expects to earn 200 % on any money he invests in the company pension plan between now and his retirement in twenty years. Except for the money he invests he anticipates no other retirement income. a. Show his budget constraint. b. What is the slope of his budget constraint? c. What is the opportunity cost of current consumption for Sam? d. Suppose that he inherits a trust fund that will pay him $10,000 when he retires. How will his budget constraint change? Will he save more or less?...
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