04 Jun Question 1. Imagine that a wealthy relative dies and
Question
1. Imagine that a wealthy relative dies and leaves you an inheritance in a trust fun that will provide you with $20,000 per year for the rest of your life. Draw a diagram to illustrate this shift in your budget constraint between leisure and consumption. After considering the ideas of income and substitution effects, decide whether this inheritance will cause you to work more or less. Explain your reasoning. (20 points)
2. Karin’s preferences for consumption and leisure can be expressed as: U(C,L)=(C-100)*(L-84). This functional form implies that Karin’s marginal rate of substitution is (C-100)/(L-84). There are 168 hours in the week available to be split between leisure and work. Karin earns $10 per hour after taxes. She also receives a weekly stipend of $220 regardless of how much she works. (30 points)
a. Graph Karin’s budget line.
b. What is Karin’s marginal rate of substitution if L=120 and if she is on the budget line?
c. Find Karin’s optimal amount of consumption and leisure.
d. What is the lowest wage that Karin would accept to enter the labor market?
3. The following table shows the number of cakes that could be baked daily at a local bakery, depending on the number of bakers. Assume that the markets for cakes and bakers are perfectly competitive. (20 points)
Number of Bakers
Number of Cakes
MPL
MRPL
0
0
1
10
2
18
3
23
4
27
Calculate the MPL.
Suppose each cake sells for $10. Calculate the MRPL.
If each baker is paid $80 per day, how many bakers will the bakery own hire, given that the goal is to maximize profits? How many cakes will be baked and sold each day?
4. According to the Bureau of Labor Statistics in 2013, the unemployment for African American men was 13.1% while 6.5% for White men. At the same time, African American men earned median usual weekly earnings of $1,002 and $1,359 for White men. (30 points)
How would neoclassical economists explain these differences? Offer at least two specific concerns that would be raised in their approach.
How would a political economist critique this approach to understanding the work experiences of minorities? Offer at least two specific concerns that would be raised in their alternative approach.
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