combination income (S) combination injury risk wage ()on wage (S) 8.00 10.00 14.

Question

combination income (S) combination injury risk wage ()on wage (S) 8.00 10.00 14.00 20.00 leisure 182 152 132 122 6.5 12.5 18.5 24.5 8.00 9.50 12.50 17.00 10 12 a. The first three columns of the table above show four combinations of leisure (measured in hours per day) and income that yield equal utility to a worker named Jon, who can allocate no more than 16 hours per day to labor and leisure. Demonstrate that Jon's preferences for leisure and income exhibit diminishing marginal utility. Explain your analysis b. Suppose Jon is offered an hourly wage of $22. Calculate the labor income Jon could earn engaging in 6, 8, 10, and 12 hours of leisure per day (as highlighted in the table) Show these calculations. Does combination A lie on Jon's budget constraint, to the left of his budget constraint, or to the right of his budget constraint? Explain. Answer this question for combinations B, C, and D as well, explaining your analysis throughout. c. The last four columns of the table show four combinations of injury risk (measured as annual accidents per 10,000 employees) for a certain job and an hourly wage rate that would yield equal utility for Jon and another worker, Kathy. Which of the two workers would more likely take a relatively dangerous job in equilibrium? Explain

Explanation / Answer

Combination leisure income MU A 6 182 B 8 152 -0.07 C 10 132 -0.10 D 12 122 -0.20 a) we can calculate the slope of the indifference curve which is the marginal utility. Looking at the values of MU one can say thathat MU is decreasing Labor income at wage =$22 Combination leisure income B A 6 220 352 B 8 176 352 C 10 132 352 D 12 88 352 b) Budget Constraint Consumption = 22(16-leisure) C+22L = 352, L=Leisureand C is consumption Substituting A inBudget Constraint 220+22*6 =220+132 =352. Thus A lies on the BC Looking at the column B we can say that all points lie Budget Constraint

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