Question

.Curious George must decide how much to work. He has 60 hours per week available that...

.Curious George must decide how much to work. He has 60 hours per week available that he can spend either working or engaging in leisure (which for him is creating various kinds of mischief). He can work at a wage rate of $5 per hour. The Man with the Yellow Hat (who looks after George) also gives him an allowance of $100 per week, no matter how much George works. George's only source of income that he can use for consumption (mostly bananas) is this allowance plus his wage earnings. A. In a carefully labelled diagram, draw George's consumption-leisure budget constraint. Show an equilibrium where George chooses to work 40 hours per week. b) In an effort to have George pay for other household expenses, The Man in the Yellow Hat decides to tax George 50 percent of his wage income. Using the same diagram you drew in part (a) (where George worked 40 hours), show what happens to his labour supply. To do this, show one possible outcome, and break it down into income and substitution effects. Explain the diagram below

Homework Answers

Answer #1

solution:

a)

On the horizontal axis, we have the leisure and the vertical axis we have the consumption.

Maximum leisure that can be enjoyed is 60 hours and hence it is the horizontal intercept.

Maximum income is the maximum wage income plus the allowance.

Maximum wage income = 5*60 = $300. Hence maximum income(consumption) = $300+$100 = $400

Since the individual gets $100 when working for 0 hours The budget line is given by ABC. And then any wage income gets added to his total income.

At equilibrium, the individual enjoys 20 hours of leisure and hence works for 40 hours per week.

b)

When wage income is taxed at 50%, the budget line rotates inward to DBC. The maximum net wage income now becomes 50% of 5*60 = $150. Hence total income = $250

Let's take the second case. With the tax, the leisure is increased to 25 hours and thus labor is reduced to 35hours. Thus the individual moves from point e to g.

The change can be broken into income effect (from e to f) and substitution effect (f to g)

Income effect:

We draw an imaginary line PQ that is parallel to the old budget line and tangent to old IC at f. The point f represents a combination of L and C that would have given the same utility with the same relative price of consumption and leisure if income had been reduced by a fixed amount. Thus income effect causes leisure to fall and labor to rise.

Substitution effect

The point f to g represents substitution effect with the effect of the change in the relative price of leisure and consumption holding utility constant. The substitution effect, on the other hand, reduced labor and increases leisure

In this case, Substitution effect (f to g) is greater than income effect(e to f), thus labor supply falls with tax.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
William receives $100 in dividends each week. He earns an hourly wage of $20 per hour....
William receives $100 in dividends each week. He earns an hourly wage of $20 per hour. Assume that there are 168 hours available to William each week. William decides to work 42 hours per week at his current wage. When his wage increase to $25 per hour, William elects to work 37 hours per week. Use a diagram to show William’s initial combination of work hours and consumption, his new combination of work hours and consumption after the wage increase,...
Ira’s only source of income is from working. He can work as many hours per day...
Ira’s only source of income is from working. He can work as many hours per day as he wishes (up to a maximum of 24 hours) at a fixed wage rate of $10 / hour. b. Suppose, that the government introduces a tax rate of 50 cents in the dollar. Suppose that leisure is a normal good that tax ends up reducing Ira’s hours worked. Show in your diagram the effect of the tax on Ira’s budget constraint and possible...
Ira’s only source of income is from working. He can work as many hours per day...
Ira’s only source of income is from working. He can work as many hours per day as he wishes (up to a maximum of 24 hours) at a fixed wage rate of $10 / hour. a. Initially, assume that there is no income tax.   Draw Ira’s budget constraint. b. Now suppose, that the government introduces a tax rate of 50 cents in the dollar. Suppose that leisure is a normal good that tax ends up reducing Ira’s hours worked. Show...
(40 marks) Bob is deciding how much labour he should supply. He gets utility from consumption...
Bob is deciding how much labour he should supply. He gets utility from consumption of beer (given by C) and from leisure time (given by L), which he spends hanging out with his friend Doug. This utility is given by the following utility function: U(C, L) = ln(C) + θ ln(L) where the value of θ was determined by your student number and ln(C) denotes the natural logarithm of consumption etc. Given this utility function, Bob’s marginal utility from consumption...
Suppose Tom has a utility function U=C*L C= consumption L= hours of leisure Tom has 100...
Suppose Tom has a utility function U=C*L C= consumption L= hours of leisure Tom has 100 hours to divide between work and leisure per week wage is $20/hr 1. Write down budget constraint in terms of consumption and hours of work 2.Tom make decisions on hours of work, leisure and consumption to max. utility. Explain why we can collapse this problem to one in which he chooses hours of leisure only 3. Find optimal hours of work and total consumption...
John’s utility function is represented by the following: U(C,L) = (C-400)*(L-100), where C is expenditure on...
John’s utility function is represented by the following: U(C,L) = (C-400)*(L-100), where C is expenditure on consumption goods and L is hours of leisure time. Suppose that John receives $150 per week in investment income regardless of how much he works. He earns a wage of $20 per hour. Assume that John has 110 non-sleeping hours a week that could be devoted to work. a.Graph John’s budget constraint. b.Find John’s optimal amount of consumption and leisure. c.John inherits $300,000 from...
Assume that a welfare program pays $200 per week if a person does not work and...
Assume that a welfare program pays $200 per week if a person does not work and reduces the welfare benefit of dollar for dollar with earnings. Assume that the individual does not have any other non wage income. Also assume that the individual has a market wage rate of $10/ hour. Assume a maximum of 120hours of leisure per week (T= 120/ week). Suppose that in the absence of the program, the person would work 20 hours per week. What...
Your friend Conrad currently works in the local grocery store. He works 32 hours per week...
Your friend Conrad currently works in the local grocery store. He works 32 hours per week and is paid an hourly wage of $ 18 per hour. While he is not allowed to work more than 40 hours per week, Conrad can choose to work any number of hours between 30 and 40 hours. Conrad is going to get a raise to $ 20 per hour next week. When you relate this fact to your economics professor, he assures you...
Each day, Luke must decide his leisure hours, L, and his consumption, C. His utility function...
Each day, Luke must decide his leisure hours, L, and his consumption, C. His utility function is given by the following equation ?(?, ?) = (? − 30)(? − 12). Luke receives $50 welfare payment per day. Show all the steps, with the definition of every new notation used in the steps. a) Suppose that Luke’s hourly wage is $5. Find Luke’s daily budget constraint equation and graph it. (5 pts.) b) If Luke’s wage is $5 per hour worked,...
Suppose you have 24 hours per day that you can allocate between leisure and working. (i)...
Suppose you have 24 hours per day that you can allocate between leisure and working. (i) Draw the budget constraint between “leisure hours” on the horizontal axis and “wage income” on the vertical when the wage rate is $40 per hour. Mark an optimum point A that is meaningful. Draw a new budget constraint when the wage rate falls to $30 per hour. Show a new optimum point B. (ii) On your indifference curve diagram, decompose the effect of the...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT