Labor Economics Exercise Answers

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Consunji, Margarette Exercise 4 Iledan, Marionne Anika LABOREC Lopez, Angeline November 28, 2012 Pascual, Jane Toledo, Charisse Zamudio, Ira Gayll 1. 2. 3. Note how the budget constraints coincide for 4-16 hours of work (0-12 hours of leisure). i. steep indifference curves who do not work For 0 to 4 hours of work, the amount of wage with benefit that a person receives is the same. Therefore, these people with very steep indifference curves will have more incentives to remain unemployed. ii. steep indifference curves who work just up to 4 hours For 0 to 4 hours of work, the amount of wage with benefit that a person receives is the same. This would change their incentive to work. They would tend to work LESS now, especially since their indifference curve is steep, indicating a preference for leisure rather than work. iii. steep indifference curves who work more than 4 hours These kinds of people work more than 4 hours because their indifference curve is tangent to the budget constraint at a point which corresponds to working hours beyond 4 hours (or below 12 hours of leisure). Beyond 4 hours, the budget constraints (with and without benefit) coincide therefore the incentive to work is unchanged. iv. flat indifference curves and work more than 4 hours These kinds of people work more than 4 hours because their indifference curve is tangent to the budget constraint at a point which corresponds to working hours beyond 4 hours (or below 12 hours of leisure). Beyond 4 hours, the budget constraints (with and without benefit) coincide therefore the incentive to work is unchanged. So it does not matter that their indifference curves are

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