Exam 3: Economic Circumstances in Labor and Financial Markets

Write down the budget constraint equation as well as the choice set for a worker who has 100 possible hours of leisure per week and can earn a wage of $25 per hour.

In the worker's leisure/consumption model, the wage is the same as the price of consumption.

A decrease in a wage taxes causes the opportunity cost of leisure to increase.

Suppose a worker gets a weekly check equal to $1,000 from a risk-free investment, has 60 hours of weekly leisure that can be devoted to work and can earn a wage of $40 per hour. a.Illustrate this worker's budget constraint, with weekly leisure hours on the horizontal and weekly consumption (in dollars) on the vertical.b Illustrate what happens to this worker's budget constraint when the weekly investment check increases to $1,500. c.Illustrate what happens to this worker's budget constraint when instead the wage increases to $50 per hour. d.Suppose the worker can hire help at $20 per hour, and each hour of help adds a half an hour to his available leisure.Will the budget constraint described in (a) change?

Suppose you earn annually compounding interest of 10% (per year) on an initial investment of $1,000.Rounded to the nearest 100, what will your balance in 10 years be?

An "endowment" is something whose value is unknown.

An increase in the interest rate is an increase in the opportunity cost of consuming in the future.

Since interest rates for borrowing are usually higher than interest rates for savings, the intertemporal budget constraint has an inward kink for individuals that earn income now and in the future.

In the typical leisure/consumption model, an increase in the wage is equivalent to a decrease in the price of the composite consumption good.

The opportunity cost of current consumption differs for borrowers and savers only if the interest rate for savers differs from the interest rate for borrowers.

A bond will pay $10,000 to its owner in 5 years.If the relevant annual interest rate is 5%, what is the bond worth today (rounded to the nearest 100)?

Progressive wage taxes cause worker leisure/consumption budgets (with leisure on the horizontal axis) to become steeper as leisure increases.

Changes in interest rates cause the same rotations of intertemporal budget lines regardless of whether you are a borrower or a saver.

In choice sets, intertemporal budget constraints illustrate consumption trade-offs over time.

A bond that promises to pay $X in 10 years must be worth less than $X now.