Tutorial 1 Solutions

# Tutorial 1 Solutions - 2-3 Tom earns \$15 per hour for up to...

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2-3. Tom earns \$15 per hour for up to 40 hours of work each week. He is paid \$30 per hour for every hour in excess of 40. Tom faces a 20 percent tax rate and pays \$4 per hour in child care expenses for each hour he works. Tom receives \$80 in child support payments each week. There are 168 hours in the week. Graph Tom’s weekly budget line. If Tom does not work, he leisures for 168 hours and consumes \$80. For all hours Tom works up to his first 40, his after-tax and after-child care wage equals (80 percent of \$15) – \$4 = \$8 per hour. Thus, if he works for 40 hours, he will be able to leisure for 128 hours and consume \$80 + \$8(40) = \$400. For all hours Tom works over 40, his after-tax and after-child care wage equals (80 percent of \$30) – \$4 = \$20. Thus, if he works for 168 hours (128 hours at the overtime wage), he will not leisure at all, but he will consume \$80 + \$8(40) + \$20(128) = \$2,960. Tom’s weekly budget line is pictured below. 2-4. Cindy gains utility from consumption C and leisure L . The most leisure she can consume in any given week is 168 hours. Her utility function is

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