Question

Ted earns $ 25 per hour and receives an allowance of $100 per week. His utility function over leisure and consumption is: U(L, C) = LC2 a.) Draw his budget constraint. Indicate the values of H, L and C at each intercept and kink. Indicate the slope of the budget constraint along each segment. (10) b.) What is Ted’s optimal choice of leisure, consumption and hours worked? (11) c.) What is his reservation wage? (4) d.) On the diagram from part (a) illustrate the indifference curve corresponding to Ted’s optimal choice. (4) e.) Draw his budget constraint if his labor earnings over $2000 are taxed at a rate of 20 % but there is no tax on his labor earnings under $2000 and no tax on his allowance. (10) Zelda is endowed with 8760 hours of time every year. She earns $50 per hour as a home appraiser and she receives $20,000 per year from a family trust. a. Draw her budget constraint. b. Suppose that if Zelda works at all in a year she needs to pay $12,000 to renew her license. Draw her budget constraint. c. Suppose that Zelda has no licensing fee. However, she may receive a disability benefit of $24,000 per year if she doesn’t work. Draw her budget constraint.

Answer 1

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