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Question 1: Budget Constraint (15 pts)
Hailey has utility over cookies c and leisure l. She can work h hours in the labor market and earn w per hour of work. She can then use her earnings to pay for cookies c at a price of p per cookie. Her budget constraint is given by
wh=pc
She has total time T, which she can devote to only labor h and leisure l. Her time constraint is
T=h+l
a. Combine the two equations above into a single equation that describes the trade-off Hailey must make between leisure and consumption. ( 2 pts)
b. Graph this budget constraint with leisure l on the x-axis and consumption c on the y-axis. (4 pts)
i. What is the maximum amount of leisure she can enjoy? This is the x-intercept. Label it on the appropriate place in the graph.
ii. What is the maximum amount of consumption she can enjoy? This is the y-intercept. Label it on the appropriate place in the graph.
iii. What is the slope of the budget constraint?
For parts c-d, suppose that Hailey receives income from the government. She will always receive M, regardless of whether she works. Her new budget constraint is
wh+M=pc
Her time constraint is the same as before.
c. Combine the new budget constraint with the time constraint into a single equation that describes the trade-off Hailey must make between leisure and consumption. (2 pts)
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d. Graph this budget constraint on the same graph as in part b. (5 pts)
i. What is the maximum amount of leisure she can enjoy? This is the x-intercept. Label it on the appropriate place in the graph.
ii. What is the maximum amount of consumption she can enjoy? This is the y-intercept. Label it on the appropriate place in the graph.
iii. If she were to not work at all, what is the maximum amount of consumption c she can have? Hint: This is where l=T.
iv. What is the slope of the budget constraint?
e. Is the following statement true, false, or uncertain? Explain your reasoning. (2 pts)
If Hailey has monotonic preferences, she is no worse off than before.
Question 1: Budget Constraint (15 pts
Hailey has utility over cookies c and leisure f. She can work h hours in the labor market and earn w per hour of work. She can then use her earnings to pay for cookies c at a price of p per cookie. Her budget constraint is given by wh=pc She has total time T, which she can devote to only labor h and leisure f. Her time constraint is
T=h+
a. Combine the two equations above into a single equation that describes the trade-off Hailey must make between leisure and consumption. (2 pts)
b. Graph this budget constraint with leisure f on the x-axis and consumption c on the y-axis. (4 pts)
i. What is the maximum amount of leisure she can enjoy? This is the x-intercept. Label it on the appropriate place in the graph.
ii.What is the maximum amount of consumption she can enjoy? This is the y-intercept. Label it on the appropriate place in the graph.
iii. What is the slope of the budget constraint?
For parts c-d,suppose that Hailey receives income from the government. She will always receive M,regardless of whether she works. Her new budget constraint is
wh +M=pc
Her time constraint is the same as before.
c. Combine the new budget constraint with the time constraint into a single equation that describes the trade-off Hailey must make between leisure and consumption. (2 pts)
1
Graph this budget constraint on the same graph as in part b. (5 pts)
i. What is the maximum amount of leisure she can enjoy? This is the x-intercept. Label it on the appropriate place in the graph.
ii. What is the maximum amount of consumption she can enjoy? This is the y-intercept. Label it on the appropriate place in the graph.
iii. If she were to not work at all ,what is the maximum amount of consumption c she can have? Hint This is where f=T.
iv. What is the slope of the budget constraint?
Is the following statement true, false, or uncertain? Explain your reasoning.(2 pts)
If Hailey has monotonic preferences, she is no worse off than before.