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Problem Set One Labor Economics - Professor Groves Due at the start of class on February 27 Directions: All writing for this problem set must be...

Need help with questions 3-7 please

Problem Set One Labor Economics – Professor Groves Due at the start of class on February 27 Directions: All writing for this problem set must be neatly handwritten or typed with graphs presented where necessary. You must answer all questions completely. While I encourage you to work together, each person must submit their own answers, in their own words. The problem set is out of 100 points. 1.) (10 points) With an initial wage rate of $15 per hour, Lisa works 45 hours per week and leisures the remaining 72 hours (she sleeps 8 hours per evening). When her wage increases to $20 per hour she works 50 per week. What is her labor supply elasticity? What does this value tell you about the shape of her labor supply curve and her sensitivity to changes in the wage? 2.) (20 points) Show on a graph and explain what happens to a worker’s desired hours of work if employers pay an overtime premium equal to “time and a half” (that is, 1.5 times the straight-time wage) for any hours worked in excess of 40 hours. What would happen to hours of work if the overtime premium were raised to double the straight-time wage? 3.) (20 points) You own a small farm near a large city, and you are about to decide whether to work on that small farm or take a job in the city. Your utility depends on your income per day (Y) and on hours of leisure (L). Assume that you have 8 hours each day to work. Your daily income from farm work is: Y f = 20h f – h f 2 where h f is hours of work on the farm, and your daily income from the city job is: Y c = 14h c where h c is hours of work in the city. a) If you can work either on the farm or in the city, but not both, which sector would you choose? b) If you can work both on the farm and in the city, how would you allocate your time? 4.) (20 points) Thomas Alexander is considering living in Los Angeles or Eugene. If he works in L.A. his real wage will be $10 an hour but he will face a 2 hour commute time per day. If he lives in Eugene, his real wage will be $5 an hour, but he will effectively have no commute time. In addition, Thomas has a trust fund that, because of cost of living differences between the two localities, pays him $12 per day if he works in L.A. and $15 per day if he works in Eugene. Thomas has 17 hours in the day to work or leisure regardless of the location he chooses. a) Draw on the same graph, the two potential budget constraints that Thomas could face based on his locational choice. Clearly indicate the city and other important aspects of the budget constraint on the graph. b) Suppose that it is known that Thomas's utility maximizing number of hours of leisure is 12.4 if he works in Eugene. Indicate this result on you graph in (A) and show that Thomas's utility maximizing hours of leisure must be lower if he works in L.A. c) Provide some intuition about the economic incentives that lead Thomas to leisure less if he works in L.A. In particular, focus on the various income and substitution effects.
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5.) (10 points) The utility function of a worker is represented by U(C,L) = C x L. The marginal utility of leisure is then given by MU L = C and the marginal utility of consumption is given by MU C = L. Suppose that this person currently has a weekly income of $600 and enjoys 70 hours of leisure per week. How many additional dollars of income would it take to make a nonworker give up 10 hours of leisure time (and remain equally happy)? 6.) (20 points) Using the multiple regression results below, answer the questions that follow (standard errors are in parenthesis below coefficient estimates). Assume that savings per year is in dollars, Y is annual income from wages or salary, ED is years of education completed, and F indicates a female respondent: μ + + + + = ) F ( . ) ED ( . ) Y ( . . year per Savings 45 222 90 50 15 0 5 150 (20.6) (0.005) (35.80) (52.68) a) Interpret the coefficient estimates on all independent variables (sign of coefficient, magnitude of estimate). b) Which independent variables are statistically significant? How do you know this? c) What is the savings penalty for men? d) What is the marginal propensity to save (MPS)? Consume (MPC)?
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