Deborah has 80 hours per week available for work and leisure. Her current wage rate is $25 per hour. Deborah has $400 of rental income every week. a) Construct a proper diagram to describe Deborah’s choice of working 40 hours per week. Calculate Deborah’s maximum possible income and optimal income, and show them in the diagram. b) Suppose Deborah recently moved into her boyfriend’s place. She shares the household expenses and is “taxed” 50% of her wage income. Draw another diagram to compare Deborah’s choice in Part a) and a new labor supply decision of working 50 hours per week due to the “tax”. Clearly label out the income effect, substitution effect and total effect in the diagram. Question Two Samantha has an annual non-labour income of $5000. Suppose she has the total available time of 4160 hours per year. Samantha's wage rate is $15 per hour, and she chooses to work 2000 hours in a year. Suppose when Samantha's wage rate increases from $15 to $18 per hour, she will work 2040 hours. At $18 per hour, if she works 2200 hours per year, she would be indifferent to her original work decision before the wage increase. a) Draw a diagram to show all the given information related to Samantha's work circumstances. Calculate all the relevant income levels and label them in the graph. b) Calculate Samantha's income effect, substitution effect and total effect related to the wage increase. Show them in the diagram.
Deborah has 80 hours per week available for work and leisure. Her current
wage rate is $25 per hour. Deborah has $400 of rental income every week.
a) Construct a proper diagram to describe Deborah’s choice of working 40 hours per
week. Calculate Deborah’s maximum possible income and optimal income, and show
them in the diagram.
b) Suppose Deborah recently moved into her boyfriend’s place. She shares the
household expenses and is “taxed” 50% of her wage income. Draw another diagram
to compare Deborah’s choice in Part a) and a new labor supply decision of working
50 hours per week due to the “tax”. Clearly label out the income effect, substitution
effect and total effect in the diagram.
Question Two
Samantha has an annual non-labour income of $5000. Suppose she has the
total available time of 4160 hours per year. Samantha's wage rate is $15 per hour, and she
chooses to work 2000 hours in a year. Suppose when Samantha's wage rate increases from
$15 to $18 per hour, she will work 2040 hours. At $18 per hour, if she works 2200 hours per
year, she would be indifferent to her original work decision before the wage increase.
a) Draw a diagram to show all the given information related to Samantha's work
circumstances. Calculate all the relevant income levels and label them in the graph.
b) Calculate Samantha's income effect, substitution effect and total effect related to the
wage increase. Show them in the diagram.
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