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by: Harrison Fahey


Harrison Fahey
GPA 3.9

O. Eren

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O. Eren
Class Notes
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This 3 page Class Notes was uploaded by Harrison Fahey on Tuesday October 13, 2015. The Class Notes belongs to ECON 4220 at Louisiana State University taught by O. Eren in Fall. Since its upload, it has received 61 views. For similar materials see /class/223017/econ-4220-louisiana-state-university in Economcs at Louisiana State University.




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Date Created: 10/13/15
BOON 4220 Fall 2013 Solutions 1 Labor Supply 1 The Marginal Rate of Substitution MRS measures the rate at which a person is willing to give up an hour of leisure in return for additional consumption while holding utility constant Put it differently it tells us how many additional dollars worth of goods it would take to bribe the person giving up an hour of leisure The convexity of the indifference curve implies a diminishing marginal rate of substitution a person is willing to give up an hour of leisure in return for less consumption along the indifference curve 2 Tom s Weekly BurlEr Line Dnllars of Equot unaimlp tinn 339513 123 1548 Hours of Leisure 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 48 per hour Thus if he works for 40 hours he will be able to leisure for 128 hours and consume 80840400 For all hours Tom works over 40 his after tax and after child care wage equals 80 percent of 30 420 Thus if he works for 168 hours he will not leisure at all but he will consume 80840201282960 3 a Shellys Weekly Budget Line Dollars of Consumption 163 Hours of Leisure If Shelly does not work she leisures for 168 hours and consumes 320 If she does not leisure at all she consumes 32051681160 b If Shelly leisures for 100 hours she works for 68 hours and consumes 320568660 Thus her MRS when doing this is M 2 2 MRS ULZC 0660 02 MUG L 80 100 80 32 c Her optimal mix of consumption and leisure is found by setting her MRS equal to her wag and solving for hours of leisure given the budget line C3205168 LgtC1160 5L 0 20 5C5L 380 L 80 10L154O L154 Thus Shelly will choose to leisure 154 hours and work 14 hours and consumes 320514390 MU d Reservation Wagezzi M RS MUL at the endowment point E C 320 20 41 w 168 80 3 MU C C 4 M RS 2 L so then the reservation wage will be at the endowment point E j 21 MUG L L 630 375 168 5 Taking a bus will save you 55 a week but it will cost you 5 hours of leisure time due to the longer commute Since the price of leisure is equal to the wage rate the monetary value of the time lost is 50 when the hourly wage is 10 and 100 when the hourly wage is 20 Therefore it makes sense for you to take a bus to work if you are paid 10 per hour7 but you will switch to driving your car if your wage increases to 20 per hour 6 The budget constraint rotates around the endowment point and the hours of work increase in a two stagermove See the class notes or section 257 Figure 29 in the text book for the complete answer 2340 7 2160 Ah 7 Elasticity Aw 0757 which indicates an inelastic supply curve 225 8 The labor supply curve would be a backward bending curve See the class notes or section 277 Figure 211 in the text book for the complete answer


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