1. Jerry has 160 hours to allocate to labor (L) or leisure (l) during a two week period. He receives $200 every two weeks from an oil well share that he inherited from his grandmother. He earns $20 per hour worked in his landscaping business. Jerry’s utility function is U(lC) = lC, where C = consumption. The price of consumption is $1 per unit. a. Write down Jerry’s budget constraint, and find Jerry’s utility maximizing levels of leisure, consumption, and labor. Graph the budget and identify the “endowment point.” b. Suppose that the wage rate falls to $10. Graph the budget. What will Jerry’s new level of leisure consumption be? c. Generalize the budget so that the payment he receives every two weeks is “M” and his wage is denoted as “w”. Find l*, C*, and L*. d. Now repeat (c), but assume that the utility function is U(l,C) = Min[l,C]. e. Now repeat (c), but assume that the utility function is is U(l,C) = l1/2 + C. f. Now repeat (c), but assume that for every dollar earned as labor income, $t has to be given to the government in the form of a tax. How are C, l, and L affected when t rises? g. Now repeat (c), but assume that a lump sum transfer of income of $S is given to the individual from the government. How will it affect C, l, and L?
Posted on: Sat, 15 Mar 2014 18:35:33 +0000
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