Managerial Economics & Business Strategy (Mcgraw-hill Series Economics)
9th Edition
ISBN: 9781259290619
Author: Michael Baye, Jeff Prince
Publisher: McGraw-Hill Education
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Chapter 4, Problem 15PAA
To determine
To draw the employee’s opportunity set and show how the opportunity set would change if the employee receives $200 worth of health insurance.
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Consider an employee who does not receive employer-based health insurance and must divide her $10,000 per week in after-tax income between health insurance and "other goods." Draw this worker's opportunity set if the price of health insurance is $2,000 per week and the price of "other goods" is $1,000 per week. On the same graph, illustrate how the opportunity set would change if the employer agreed to give this employee $2,000 worth of health insurance per week (under current tax laws, this form of compensation is nontaxable). Would this employee be better or worse off if, instead of the health insurance, the employer gave her a $2,000 per week raise that was taxable at a rate of 25 percent? Explain.
Consider an economy composed of 16 consumers. Of these, 5 consumers each own one right shoe and 11 consumers each own one left shoe. Shoes are indivisible. Everyone has the same utility function, which is Min(2R, L}, where R and L are, respectively, the quantities of right and left shoes con sumed.
A) (10%) Is the status quo (where each individual has his own shoe) Pareto efficient? If so, briefly explain why. If not, provide a Pareto improvement
b) (10%) Characterize all Pareto efficient allocations
Suppose a person can work up to 80 hours per week at a pre-tax wage of $20 per hour but faces a constant 20% payroll tax. Assume that under these conditions the person maximizes utility by choosing to work 50 hours each week. The government proposes a negative income tax so that everyone receives $300 per week regardless of how much they work. To pay for the negative income tax, the payroll tax would be increased to 50%. Using the labor-leisure model, graphically show whether a person would be better off if the negative income tax is
adopted and indicate whether hours worked increases or decreases due to the policy.
Chapter 4 Solutions
Managerial Economics & Business Strategy (Mcgraw-hill Series Economics)
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- Terry attends college and works part-time in a drug store. She can work up to 40 hours per week and is paid $9 per hour. With her schoolwork and other responsibilities, she only has 40 hours per week total to devote to work and leisure. The following table shows her utility from different levels of leisure and income. Hours of Leisure Total Utility from Leisure Marginal Utility of Leisure Work Hours Income Total Utility from Income Marginal Utility from Income 5 18 5 45 35 10 34 10 90 59 15 48 15 135 77 20 56 20 180 86 25 60 25 225 92 30 65 30 270 98 35 69 35 315 103 40 72 40 360 107 Terry decides to decrease her work hours from 20 to 10. 8. What would be marginal utility loss from less income?arrow_forwardIn the past, Andy received a university scholarship of Rp2,000,000 per month to purchase textbooks (B) and daily needs (L). At that time, Andy maximized his utility by spending Rp500,000 for textbooks and Rp 1,500,000 for daily needs, Now graphically show the allocation of the scholarship that maximized Andy's utility (B on the horizontal axis and L on the vertical axis) and interpret it!arrow_forwardSuppose you wants to go in for Swimming and GYM sessions during your holiday this Summer. The price of Swimming is $50 per session, and price for GYM is for $30 per session. Suppose you have $3000 available to spend on these two activities during your holiday this Summer. How will the consumer’s opportunity set (budget line) changes when price of Swimming decreases to $40? Show your answer on your graph in part b above (use colored ink). How does decrease (to from $50 to $40) affects Market rate of substitution?arrow_forward
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