Consider the AFDC program for an individual as described in end-of-chapter exercise 3.18.
A. Consider again an individual who can work up to 8 hours per day at a wage of $5 per hour.
(a) Replicate the budget constraint you were asked to illustrate in 3.18A.
(b) True or False: If this person?s tastes are homothetic, then he/she will work no more than 1 hour per day.
(c) For purposes of defining a 45-degree line for this part of the question, assume that you have drawn hours on the horizontal axis 10 times as large as dollars on the vertical. This implies that the 45-degree line contains bundles like (1,10), (2,20), etc. How much would this person work if his tastes are homothetic and symmetric across this 45-degree line? (By ?symmetric across the 45-degree line? I mean that the portions of the indifference curves to one side of the 45 degree line are mirror images to the portions of the indifference curves to the other side of the 45 degree line.)
(d) Suppose you knew that the individual?s indifference curves were linear but you did not know the MRS. Which bundles on the budget constraint could in principle be optimal and for what ranges of the MRS?
This question was answered on: Jul 11, 2017
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