PracticeProblems-5sol

# PracticeProblems-5sol - Econ 101 Winter 2011 Practice...

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Econ 101, Winter 2011: Practice Problems #5 Suggested Solution 1. Nicoholson-Snyder, 16.3 (a) Grant = 6000 - .75(I) If I = 0, Grant = 6000; I = 2000, Grant = 4500; I = 4000 Grant = 3000. (b) Grant is zero when 6000 : 75 I = 0 , so if I = 8000 the grant is zero. (c) Assume there are 8000 hours in the year. Full Income = 4 x 8000 = 32 ; 000 = c + 4 h (d) Full Income = 32 ; 000 + grant = 32 ; 000 + 6000 ( : 75)(4)(8000 h ) = 38 ; 000 24 ; 000 + 3 h = c + 4 h Thus, 14 ; 000 = c + h for I < 8000 (because the grant is zero when I = 8000) ; that is for h > 6 ; 000 . The grant creates a kink at 6 ; 000 hours of leisure. Leisure is inexpensive for h > 6000 ; expensive when h < 6000 (e) See the graph below (f) Full Income = 32 ; 000 + grant = 32 ; 000 + 0 : 5 f 6000 ( : 75)(4)(8000 h ) g = 23 ; 000 + 2 h = c + 4 h New budget constraint is 23 ; 000 = c + 2 h for h > 5000 (g) Income and substitution e/ects of law change work in opposite directions. Substitution e/ect favors more work; income e/ect, less work. 2. Nicoholson-Snyder, 16.4.

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PracticeProblems-5sol - Econ 101 Winter 2011 Practice...

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