Suppose Madison Haley had 16 hours in the day to work or leisure. She earns
$5 an hour and has $15 per day in nonlabor income.
Draw her labor-leisure constraint.
Suppose Madison maximizes her utility by working 8 hours a day (i.e.
h=8). Solve for the amount of leisure (L) consumed and the amount of income
earned. Depict these equilibrium values in your graph in (A).
Most real estate transactions pay realtors a commission of 6 percent of
the sale of which 2 percent is paid to their real estate office. This translates
to $25 an hour for the average realtor. Recently, however, a firm called TREX
has adopted a system whereby the realtor pays the firm $50 a day upfront,
but then keeps the full 6 percent commission or $37.50 an hour for the average
realtor.
Draw two budget constraints on the same graph for the average realtor
working for TREX and the "standard" real estate firm if there
are 20 hours in the day to work or leisure and nonlabor income is equal
to zero.
There has been much complaining from "standard" real estate
firms that TREX has hired all of the "good" realtors. Use your
graph in (A) to show that realtors who work more than four hours a day
for a standard firm would prefer working for TREX.
Use the concept of income and substitution effects to explain why realtors
work more hours for TREX than for standard firms.
Thomas Alexander is considering living in L.A. or Eugene. If he works in
L.A. his real wage will be $10 an hour but he will face a 2 hour commute time.
If he lives in Eugene, his real wage will be $5 an hour, but he will effectively
have no commute time. In addition, Thomas has a trust fund that, because of
cost of living differences between the two localities, pays him $12 if he
works in L.A. and $15 if he works in Eugene. Thomas has 17 hours in the day
to work or leisure regardless of the location he chooses.
Draw on the same graph, the two potential budget constraints that Thomas
could face based on his locational choice. Clearly indicate the city and
other important aspects of the budget constraint on the graph.
Suppose that it is known that Thomas's utility maximizing number of
hours of leisure is 12.4 if he works in Eugene. Indicate this result on
you graph in (A) and show that Thomas's utility maximizing hours of leisure
must be lower if he works in L.A.
Provide some intuition about the economic incentives that lead Thomas
to leisure less if he works in L.A.
Draw a labor-leisure graph for an increase in the wage that indicates that:
leisure is a normal good with labor supply having negative slope.
leisure is a normal good with labor supply having a positive slope.
leisure is an inferior good (i.e., labor supply has a positive slope).
