Exam (elaborations)
Solution Manual For Labor Economics, 9th Edition George Borjas Chapter(2-12)
- Course
- Institution
Solution Manual For Labor Economics, 9th Edition George Borjas Chapter(2-12)
[Show more]
Content preview
1 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC. Solution Manual For Labor Economics, 9th Edition George Borjas Chapter 2-12 With(Files Solution State) CHAPTER 2 2-1. It is costly to commute to work, and the cost typically involves both time and money. (a) Suppose that a worker ’s commute involves traveling a long distance on a highway that is about to start charging toll fees of $ Y. There is no other way for the person to get to their job. What will happen to hours of work as a result of this increase in commuting costs? In the absence of the toll fees, the worker would choose point P and work 0TL hours. If it costs $ Y to get to work, the budget line shifts down by $ Y, and the worker would then choose point R and would work 1 TL hours. The introduction of toll fees, therefore, acts like an income effect, reducing the demand for leisure and lengthening the work week. (b) Suppose a worker ’s current job is located very near to their house, so that the time it takes to commute to work is essentially zero. The firm is considering a move to another town, and it will then take the worker 10 hr per week to get to and from work, regardless of how many hours the worker actually decides to work. What will happen to the worker ’s 2 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC. hours of work (de fined as hours actually spent on the job) as a result of this increase in commuting costs? To determine what happens to hours of work, it is important to distinguish between hours actually spent at work and hours spent commuting. In the absence of time c ommuting costs, the worker would choose point P and work 0TL hours. If it takes 10 hr to commute, the worker would then choose point R and would spend a total of 1 TL hours either commuting or working. Note, however, that the number of hours actually spent working declines from 0TL to 1 10()TL . Even though the commuting costs induce an income effect, reducing the total number of hours spent consuming leisure, hours spent at work actually decline because so much of the leisure time released by the income effect is spent commuting. (c) Why do the different types of commuting costs have different effects on hours of work? A toll increas es hours of work, while an increase in ―time‖ commuting costs decreases hours of work. The one common result in both parts of the problem is that hours of leisure declines. In the presence of time commuting costs, however, the reduction in leisure time is ―consumed away‖ by the increase in the amount of time that it takes to get to work. 2-2. Charlie and Larry both face the same budget line for consumption and leisure. At every possible consumption –leisure bundle on the budget line, Charlie always requires marginally more leisure than does Larry in order to be equally happy when asked to forego a dollar of consumption. Using a standard budget line, graph several indifference curves 3 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC. and the optimal consumption –leisure bundle for both people. Which person opti mally chooses more consumption? Which feature of indifference curves guarantees this result? Because Charlie requires receiving more leisure than Larry when giving up consumption, Charlie’s indifference curves are flatter relative to Larry’s. This feature —shallower or flatter indifference curves —results in that person (Charlie) optimally choosing more of the Y-axis good. Similarly, Larry’s indifference curves are steeper relative to Charlie’s, because Larry does not need to receive as much leisure when givi ng up consumption. This feature —steeper indifference curves —results in that person (Larry) optimally choosing more of the X-axis good. These ideas are all incorporated in the graph below where the solid lines represent an assortment of indifference curves for Charlie and the dashed lines represent an assortment of indifference curves for Larry. 2-3. Tom earns $15 per hour for up to 40 hr of work each week and $30 per hour for every hour in excess of 40. Tom also faces a 20 % tax rate, pays $4 per hour in childc are expenses for each hour he works, and receives $80 in child support payments each week. There are 110 (non -sleeping) hours in the week. Graph Tom’s weekly budget line. If Tom does not work, he leisures for 110 hr and consumes $80. For all hours Tom work s up to his first 40, his after -tax and after -childcare wage equals (80%of $15) $4 $8 per hour. Thus, if he works for 40 hr, he will be able to leisure for 70 hr and consume $80 $8(40) $400 . For all hours Tom works over 40, his after -tax and after -childcare wage equals (80%of $30) $4 $20 . Thus, if he works for 110 hr (70 hr at the overtime wage), he will not leisure at all, but he will consume $80 $8(40) $20(70) $1,800 . Tom’s weekly b udget line is pictured below. 4 © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC. 2-4. Cindy gains utility from consumption C and leisure L. The most leisure she can consume in any given week is 110 hr. Her utility function is () U C,L C L . This functional form implies that Cindy’s marginal rate of substitution is CL . Cindy receives $660 each week from her great -grandmother —regardless of how much Cindy works. What is Cindy’s reservation wage? The reservation wage is the MRS when not working at all. Thus, RES MRS w at maximum leisure equals / $660 /110 $6.00.CL 2-5. Currently , a firm pays 10% of each employee’s salary into a retirement account, regardless of whether the employee also contributes to the account. The firm is considering changing this system to a 10% match, meaning that the firm will match the employee’s contribut ion into the account up to 10% of each employee’s salary. Some people at the firm think this change will lead employees to save more and therefore be more able to afford to retire at a younger age, while others believe this change will lead employees to sa ve less for retirement and therefore be less able to afford to retire. Explain why either point of view could be correct. Either point of view may be correct. The first assumes that the new matching system will encourage workers to save at least 10% of the ir salary into the retirement account, because it is matched. In essence, each dollar of personal savings receives an automatic and immediate 100% return. Alternatively, if the workers feel that they simply cannot save for retirement, then the change to a matching system may result in fewer dollars saved for retirement as the workers save very little (say 2%) and the firm then only matches the 2%. With this example, a worker’s retirement account is receiving 4% of their salary each year compared to the 10% it received before the change. Clearly, the matching system provides fewer funds for retirement if the workers are not ―savers‖ during their work -life.
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller solutions. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $17.49. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
82871 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now