Suppose Madison Haley has 16 hours in the day to work or leisure. She earns $5 an hour and receives $15 each day in non-labor income.
Draw her labor-leisure constraint.
Suppose Madison maximizes her utility by working 8 hours a day. Solve for the amount of leisure consumed and the amount of income earned. Indicate these equilibrium values in your graph in (A).
Most real estate transactions pay realtors a commission of 6 percent of the sale of a property, of which 2 percentage points 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 for use of the company's name, but the realtor 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 non-labor 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 hourly wage will be $10 but he will face a 2 hour commute time. If he lives in Eugene, his real hourly wage will be $5 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 per day if he works in L.A. and $15 per day if he works in Eugene. Thomas has 17 hours in the day to work or leisure regardless of the location he chooses.
Draw the two potential budget constraints that Thomas face based on his choice of location.
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).
Draw a labor-leisure graph for a decrease 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).
