Question

Part II Suppose that Chilhong's total time endowment is 24 hours and the given wage rate is W 10,000 per hour. Draw Chilhong's budget line in a diagram with leisure and labor supply on the horizontal axis and income per day on the vertical axis. Say Chilhong chooses to earn W 100,000 per day. How much is Chilhong's leisure at the equilibrium? 1. 2. How much is Chilhong's labor supply at the equilibrium? Now suppose there is a negative income tax system that offers a grant decreasing proportionally to the daily earning. If there is no earning, a baseline grant of W 30,000 per day will be offered. But the grant is reduced by ₩ 0.3 for every \ 1's labor income, until it is eliminated altogether. That is, there is no positive income tax. 3. Draw the newbud line. What is the slope of the new budget line if Chilhong works for les:s than 10 hours per day? 4. How would Chilhongs labor supply vary? Assume Chilhong's indifference curve has a conventional shape.

Answer 1

1.At equillibirium Chillhong is working for 100,000/10,000=10 hours per day, so leisure= 24-10=14

2.Chillong's labour supply= 10 hours per day.

3. In the new scenario, slope of Chillong's new budget line is flatter till 10 hours of work i.e -7000 instead of -10000.

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4.Chillong's labour supply might vary in the sense that, now he/she might prefer to work less than 10 hours per day as increment for every hour till 10 hours is only 7000 per hour compared to 10000 per hour in the above scenario.How much will they work depends on the particular utility function.

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