ECON 2037 Intermediate Microeconomics II - Winter 2021
Assignment 4
Instruction: Answer ALL Questions. Show your work for any calculations done. Total marks 40.
Due Date: April 15, 2021
1. An individual’s utility depends on Y = income and h = hours of leisure. Suppose the wage rate
is 10 per hour and the person has $400 in non-labour income. Suppose the person has 24 hours
to divide between leisure and working.
(a) Write the person’s budget constraint. Draw the budget constraint on a graph. (2)
(b) Suppose the person chooses not to work. What do we know about person’s marginal rate
of substitution (MRS) if the person chooses not work? Draw this situation by adding an
indifference curve on your graph. Recall the MRS is minus the slope of the indifference
curve. (∆Y/∆h) (4)
(c) Now suppose the person has a Utility function given by
U = Y 1/2h
This utility function gives a MRS between income and leisure of:
MRS =
2Y
h
i. Does this person want to work? Explain your answer in the context of the previous
question. (4)
ii. What happens to this individual’s optimal choice of hours worked if non-labour income
falls to $300 and the wage rate does not change? Explain and illustrate on a diagram
the impact of the wage change on the individual’s optimal choice (4)
iii. What happens to this individual’s optimal choice of hours worked if the wage rate in-
creases to $20 per hour and the non-labour income falls to $400? Explain and illustrate
on a diagram the impact of the wage change on the individual’s optimal choice (4)
2. Cu
ently, George works 12 hours at a job that pays $2 per hour for the first 8 hours and $3 pe
hour for every hour worked after 8 hours. George is offered a job that pays $2.5 per hour. Using
a indifference curve-budget line diagram explain whether George take the new job or stays at his
cu
ent job. Assume George’s non-labour income is $0.
3. A monopsonist marginal revenue product (MRP) curve is given by MRP = 60 − 2L, where L is
the quantity of labour hours hired. The labour supply curve faced by this monopsonist is W = 2L.
(a) What is the monopsonist’s marginal factor cost curve (MFC)? (2)
(b) Solve for the profit maximizing level of employment and wage this monopsonist pays. (2)
(c) What happens to employment if minimum wage is set to $15 per hour? Show the results in
a diagram (4)
(d) Suppose you are hired to recommend a minimum wage. What is the minimum wage you
would recommend? Justify your answer and provide a diagram. (4)
4. A bond cu
ently promises annual payments of $200 per year for 5 years. In addition, the bond
will make an additional single payment on maturity (in the fifth year) of $500.
(a) What is the price of the bond if the interest rate on similar investments is cu
ently 5%
(i = 0.05)? Explain and show calculations. (4)
(b) What is the price of the bond if the interest rate on similar investments rises to 10% (i = 0.1)?
Show your work. (4)
5. Answer all the following questions True, False or Uncertain. Give a
ief explanation of you
answer. You receive 1 mark for co
ectly identifying T, F or U and 3 marks for your explanation.
(a) The wage rate a monopolist pays is $10 per hour. The monopolist’s marginal product of
labour is cu
ently 2 and the cu
ent product price is $5 per unit of output. This firm does
not want to change its employment.
(b) A maintenance-free (m=M=0) machine costs $100 to purchase. It is projected that the
machine will generate revenues (MRP) of $50 in each of the following two years. In addition,
it can be sold for scrap at a price of $20 in the second year. The firm should purchase the
machine if the interest rate facing the firm is 10% (.1).
2