- 27 Ricardo Has 50 Day In Nonlabor Income Pays 1 For Each Unit Of X Market Goods And Receives 2 For Each Hour Wor 1 (90.92 KiB) Viewed 32 times
27. Ricardo has $50/day in nonlabor income, pays $1 for each unit of X (market goods), and receives $2 for each hour worked in the labor market. His preferences for X and L (leisure) are such that his marginal rate of substitution (L for X) equals 2 when he consumes 24 hours of L and 50 units of X each day. From this information, we know that: a) Ricardo's reservation wage is $2. b) Ricardo is failing to maximize utility if he consumes 24 hours of L each day. c) The 50th unit of X and the 24th hour of L both give Ricardo the same marginal utility. d) Ricardo will choose to work in the labor market if his wage exceeds $1/hour. e) Ricardo has a backward-bending labor supply curve. 28. The diagram below shows the demand (D) curve, supply (S) curve, and marginal social cost (MSC) curve in the market for "good X.” The production of X imposes a negative externality in the form of air pollution. Which output level of X is socially optimal? MSC S a) X=0 (no output) b) X" D c) X* Units of X X X* X" d) X e) The socially optimal output level cannot be determined.