LABOR ECONOMICS
8th Edition
ISBN: 9781260004724
Author: BORJAS
Publisher: RENT MCG
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Question
Chapter 2, Problem 15P
(a)
To determine
Graphically illustrate the budget line for each type of worker.
(b)
To determine
Determine the type of worker who is ready to work up to the point of the kink and who is kept far away from that point.
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The absolute value of the slope of the consumption-leisure budget line is the after-tax wage, w. Other workers earn w for up to 40 hours of work each week, and then w thereafter as at a second job which pays the same hourly wage as than their primary job.
Assume a worker has 168 hours per week and chooses to work 40 hours at the primary job and does not work at a second job. Graph the worker’s budget line and leisure and income at the utility-maximizing level.
Assume the primary employer offers the worker an opportunity to earn time-and-a-half working overtime. The overtime pay kicks in after the employee works 40 hours. Graph the old and new budget line and indicate both the number of hours worked and the income earned.
(i) Keith’s marginal utility of leisure is C – 20 and his marginal utility of consumption is L – 50. There are 110 hours in the week available to split between work and leisure. Keith receives £250 of welfare payments each week regardless of how much he works (assume he spends all of his welfare payments on consumption). What is Keith’s reservation wage?
(ii) Suppose Danny receives the same welfare payments each week as Keith and has the same number of available hours (110). However, Danny’s indifference curve is flatter than Keith’s. How would his reservation wage compare to Keith’s? Why?
Rebecca's wage is $10 per hour, and she can work up to 60 hours per week. The table and the budget
constraint graph show the trade-off that she faces between income and leisure in one week of potential work at
this wage.
Her manager raises her wage to $15 per hour. Change the graph below to illustrate her new income-leisure
budget constraint. The line and the individual endpoints are movable. Assume that nothing else changes.
Hours Leisure time Income ($)
(hours)
worked
at $10/hour
0
200
400
600
0
20
40
60
60
40
20
0
Income ($)
1000
900
800
700
600
500
400
300
200
100
0
0
10
20
30
40 50 60 70 80 90
Leisure (hours)
Chapter 2 Solutions
LABOR ECONOMICS
Ch. 2 - Prob. 1RQCh. 2 - Prob. 2RQCh. 2 - Prob. 3RQCh. 2 - Prob. 4RQCh. 2 - Prob. 5RQCh. 2 - Prob. 6RQCh. 2 - Prob. 7RQCh. 2 - Prob. 8RQCh. 2 - Prob. 9RQCh. 2 - Prob. 10RQ
Ch. 2 - Prob. 11RQCh. 2 - Prob. 12RQCh. 2 - Prob. 1PCh. 2 - Prob. 2PCh. 2 - Prob. 3PCh. 2 - Prob. 4PCh. 2 - Prob. 5PCh. 2 - Prob. 6PCh. 2 - Prob. 7PCh. 2 - Prob. 8PCh. 2 - Prob. 9PCh. 2 - Prob. 10PCh. 2 - A worker plans to retire at the age of 65, at...Ch. 2 - Prob. 12PCh. 2 - Prob. 13PCh. 2 - Prob. 14PCh. 2 - Prob. 15P
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Similar questions
- Fill in the blanks and round to 2 decimals where needed. Katie has 75 hours per week to allocate to leisure or work. She has a job that pays $30 per hour, she has $150 nonlabour income per week and the price of the (composite) consumption good is p=$1. Her preferences are given by U(C,L) = ½ C L. Katie's reservation wage is $ 30 and she prefers to work 87.5 hours per week. If Katie's nonlabour income rises to $210, she would prefer to work 68 hours per week. If Katie's hourly wage was to rise to $40, she would prefer to work 72 hours per week (with the original Yn=150). Considering the change in hours in response to the wage rise, the effect clearly dominates the effect.arrow_forward1. The absolute value of the slope of the consumption-leisure budget line is the after-tax wage, W. Suppose some workers (L1) earn W for up to 40 hours of work each week, and then earn 2W for any hours worked thereafter (called overtime). Other workers (L2) earn W for up to 40 hours of work each week, and then only earn 0.5W thereafter as working more than 40 hours requires getting a second job which pays an hourly wage less than their primary job. Both types of workers experience a “kink” in their consumption-leisure budget line. A. Refer to graph. Which one of the statements below describes the consumption-leisure budget line for L1 and L2 a. L2 budget line is CBT-40 b. L2 budget line is ABT c. L1 budget line is CBT d. L1 budget line is ABT B. Refer to graph. Which type of worker is likely to work up to the point of the kink? a. L1 b. L2 C. Refer yo graph. Which type of worker is likely to choose a consumption-leisure bundle far away from the kink a. L1 b. L2arrow_forwardSuppose that the utility function of an individual is given by U=YL2, where Y is real income and L is leisure time. The marginal utilities are MUL =0.5YL-1/2 and MUy=0.5Y-12L1/2 There are 15 hours available for labour/leisurer the current wage rate is $20 per hour, and the price index for real income is 5. Assume that there is no non-labour income. Show minimal calculation work. a) Determine the budget constraint function? b) Determine the optimal relationship between income and labour hours? C) Calculate the optimal amount of labour hours? d) Calculate the optimal amount of leisure hours? e) Calculate the income level of the individual at the optimal condition? - Calculate the utility level for the individual at the optimal condition?arrow_forward
- Akua gains utility from consumption C and leisure L. The most leisure she can consume in any given week is 110 hours. Her utility function is U (C, L) = C × L. Akua receives 660 GHS each week from her great-grandmother—regardless of how much she works. a. What will be Akua’s marginal rate of substitution. b. What will be Akua’s reservation wage? (Explain in detail)arrow_forwardConsider the following labor-leisure choice model. Utility function over consumption (C) and leisure (L) U(C.L) = (1/3L1/3 Total hours: H = 40 Labor hours: NS = H - L Non-labor income: π = 30 Lumpsum tax: T = 10 Hourly wage: w = 4 Suppose the hourly wage changes to w = 3. What is the substitution effect of this change on labor supply? A. +2.65 B. -2.65 C. +3.48 D.-3.48 E. None of the abovearrow_forwardThe AB line in the below graph represents a worker's budget constraint (AB line). A utility- maximizing worker chooses the consumption- leisure bundle at point P, where the indifference curve is tangent to the budget line. Please analyze the impact of a new unemployment benefit program that consists in an amount "AG" if the worker is unemployed. This benefit is lost if the worker finds a job (even if he only works for one hour). B G A U1 Hours of Leisurearrow_forward
- Consider the following Labour-Leisure Choice model. Utility function over consumption (C) and leisure (L) 1 3 U(CL) = cL4 Total hours H = 20 Labour hours: N = H-L Non-labour income: 1 = 20 Lump-sum tax T= 10 Hourly wage w = 3 Suppose that the hourly wage increases to 5 What is the substitution effect of this wage change on labour supply(N)? A. -1.10 B. -2.10 O C. +1.10 OD. +2. 10 O E. None of the abovearrow_forwardTwo labor-leisure choice diagrams are shown below. In both cases, the labor-leisure choice diagrams show how the individual's desired amount of leisure is influenced by the increase in her or his wage rate from w/ to w₂. INCOME a. 24W2 24W₁ Figure A b. Leisure is normal. Figure A HOURS OF LEISURE Figure A Figure B For each of the following statements, please indicate if the statement is TRUE (between wage rates w/ and w₂) for Figure A, Figure B, both figures, or neither figure. Please circle your response. The substitution effect is zero. Figure A Figure B Figure B c. Leisure is neither normal nor inferior. INCOME Figure B 24W2 24W1 Both figures Both figures HOURS OF LEISURE Both figures Neither figure Neither figure Neither figurearrow_forwardFor every hour up to 40 hours of work each week, Mary earns $16/hour, and for any extra hour in excess of 40, she earns $20/hour. The current tax rate that she faces is 20%. She also needs to pay $4 per each hour she works for childcare service while receives $80 in childcare support payments each week. Mary has 16 non-sleeping hours a day (112 hours) in a week. Her non-labour market income is $60 per week. What will be her weekly consumption amount if she works for 58 hours a week?arrow_forward
- Raka has 80 hours per week that she can allocate to work or leisure. Her job pays a wage rate of $20 per hour, but Raka is being taxed on her income in the following way. On the first $400 that she makes, she pays no tax. That is, for the first 20 hours she works, her net wage—what she takes home after taxes—is $20 per hour. On all income above $400, Raka pays a 75% tax. That is, for all hours above the first 20 hours, her net wage rate is only $5 per hour. Her indifference curves conform to the usual assumptions about consumer preferences. Raka’s optimal choice is to work 30 hours.Draw Raka’s time-allocation budget line for a typical week.arrow_forwardRefer to the following diagram. Point A is 24 hours, C is 14 hours, D is 8 hours, and E is 6 hours. Income B₂ 0 D -Leisure If the current wage rate results in a budget constraint of AB2, how many hours will the individual work?arrow_forwardTrue or False. Explain why. Deniz’s preferences for consumption and leisure is as follows:U(C,L)=C2LDeniz has 100 hours in the week available to split between work and leisure. She earns $10 per hour after taxes. She also receives $260 worth of welfare benefits each week. Deniz’s optimal amount of leisure time will be 45 whereas labour supply will be 55.arrow_forward
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