A worker earns £15 pounds an hour and chooses to work six hours a day. The worker has no other source of income. For the
Posted: Thu May 19, 2022 7:40 am
A worker earns £15 pounds an hour and chooses to work six hours
a day. The worker has no other source of income. For the question
below, assume that the worker has “standard” CobbDouglas
preferences. When considering wage changes, assume that the “income
effect” outweighs the “substitution effect”.
(a) Write down the worker’s budget constraint and then represent
the worker’s choice in a suitably labelled graph.
(b) The government gives the worker £80, but taxes the worker’s
wage, such that their take-home wage is £10. Model this policy in a
suitably labelled graph. Is the worker better off (in terms of
utility) after this policy? Note –there are a range of correct
answers for the worker’s new hours/income. Choose one that is
consistent with the information given in the question.
a day. The worker has no other source of income. For the question
below, assume that the worker has “standard” CobbDouglas
preferences. When considering wage changes, assume that the “income
effect” outweighs the “substitution effect”.
(a) Write down the worker’s budget constraint and then represent
the worker’s choice in a suitably labelled graph.
(b) The government gives the worker £80, but taxes the worker’s
wage, such that their take-home wage is £10. Model this policy in a
suitably labelled graph. Is the worker better off (in terms of
utility) after this policy? Note –there are a range of correct
answers for the worker’s new hours/income. Choose one that is
consistent with the information given in the question.