Name: Economics 151A. Student ID Number Spring 2015 Dr. Janine L.F. Wilson Midterm #1 Labor Supply ‘You will be given one hour and twenty minutes to complete this exam. Show alll work. Label graphs carefully including the axes. Credit will be given to correct answers only if there is back-up work. Part I: Problems 1. Patty’s utility fimetion is given by U=(C-300)*L, where C is expenditure on consumption goods and L is hours of leisure time. Suppose that Patty receives $60/week in investment income (non-labor income) and earns a wage of $10/hour. Assume that Patty has 110 non-sleeping hours in a week that could be devoted to work. a, What is her optimal (utility-maximizing) amount of consumption C, and hours of leisure L (calculate the numbers)? Draw the budget constraint and an indifference curve that would represent Patty’s optimal leisure~ consumption choice. (8 points) Uz COs Ow’ = Cc at Ou C200 W a . ju dee oc \leo OC C= 20210 ct unere can CTU 4 C= Wlod-10L P lyogiegin ie b WMed- 1OL-BO _ 1g L $i 220e Ce) C= Wed -l0(ud) #430Name: Economics 151A ‘Student ID Number Spring 2015 Dr. Janine L.F. Wilson b. The annual dollar amount considered the poverty threshold in California in 2013 for an individual is $11,702 (the dollar amount required to have housing and food to survive). Assume that California started an income ‘maintenance program where everyone is assured $11,702 in income. Specifically, each week Patty gets a welfare check for $225 if she ears $0, For every dollar that she ears, she loses 25 cents in welfare benefits. Graph her new constraint under the income maintenance program below assuming 110 working hours possible in a week and a wage rate of $10/hour. (Label all slopes and points including at what point Patty loses all welfare benefits and returns to her original constraint and how many hours she will leisure when she loses all welfare benefits.) (8 points) ad 20 WoL ¢. Given your answers in part a, would Patty increase or decrease her hours worked with the introduction of the income maintenance program above. Describe both the income and substitution effects of the change in budget, constraint for Patty in detail making sure to define both effects in your answer. (6 points) Tome Shek: \ vicher w/ we Chan she See ree ve mae \e\su nd SS \ le pe er APPT “uci se a MOE eee nce 20 Tet issue Tack. leas aeogName: ae Economics 151A Student 1D Number Spring 2015 Dr. Janine L.P. Wilson 4. Now suppose there is anew government program for single parents instead of the income maintenance program above giving them an earned income subsidy. Under the program, for every dollar that Patty ears from $1 to $530 per week, she gets a 40% subsidy. If she earns between $531 and $690 he can keep the maximum subsidy. For every dollar she earns greater than $690, she loses 31.06 cents of his subsidy. Draw Patty’s new budget constraint below labeling carefully. Please show all your work so labeling all kink vaugjon the axes and slope values. (8 rein) we ola mos selegey is Pa Rae $530x0.80 = ae ie eo 4S30e08 + WD uneas a ‘oe pare rooan cba ey ke ca o var equdle “gsowen or yt’ # (AD encarta (66 uneat 2 ye a have #450 oaucasl (a DOW . Q She eqns #902 coat on Hot \ noes saves 40 oe HUD G15 eacncd 5 7- . “Blo ts use whale credit, “Gy \ ere are oH Vat cowed ‘ whiddg oe'e.| EXfa| Wo L e ok ae vatty increase or i the amount of hours that he works under the income subsidy (compared to no government program at all) given your answer in part a? Describe both the income and substitution effects of the change in budget constraint for Patty in detail ie poi el Cary 4430 gq Xe old constraint oe bro Sve income. Src con lceeP Duk Wk earn MOK V9 4 Se oer ents op EAE Noha espect f. Doyou vel that the indome maintenance program or the earned income subsidy is a better program? Give your reasoning. (6 poit A wel explained auiswer wi oO clear UNd OS \\ tow he com reaches epecific apals Oe ovd\ined “at ANE anSWer ,fame: Economics 151A Student ID Number Spring 2015 Dr. Janine LF. Wilson 2. Ina New York Times article published in 2012 called “The Disability Trap” Brad. Crelia, a permanently disabled American describes his situation. He now receives amonthly check for $506 through the Supplemental Security Income, S.S.1 program, and he is allowed to earn $85 more. (He also receives some assistance toward his rent and food expenses.) Once he surpasses the $85, his benefit check will be reduced by $1 for every $2 he earns. And if his income reaches $1,097 a month, he will no longer be eligible for any cash S.S.1. benefits at all. So he must be poor or he must give up all government support. Mr. Crelia is never permitted to have more than $2,000 in the bank, a restriction that places the trappings of a middle-class life — a car, a modest home, a family — far out of reach. a. Assume that Mr. Crelia earns $15/hour in the market when he is feeling ‘well enough to work. Describe the labor supply implications of the S.S.L program graphically and verbally. How does the program discourage his labor supply? (8 points) 7 Cc rx lowers Wis {plicit Sage by taking sos a he bench ts an about . fo hours, b. Why would the goverment put together a program with the incentives that you described in part a? (5 points) cause we dont wont Ks ct ¥e ew tne we want con “Bopper Smeeles. TOKpayess do ver We Xp poy Trem wf Thee owln Koge if aot can earn thelr own (wit. ¢. Burkhauser and Daly, economists studying the topic, point to the transition from AFDC to EITC in 1996 and believe that a similar transition would be good for the S.S.I. program. How would this be good for those on S.S.1? How would this be bad for those on $.S.1.? (6 points) _ in eC ot \ 46 ~ Putting & wack reguicem ee UK weeks encdacoge pore We WOE: 2 me pele se nN disakled and ‘1Name: Economics 151A. Student ID Number Spring 2015 Dr. Janine L.F. Wilson 3. The Social Security or “old-age insurance” system in the United States currently uses an “eamings test” for those collecting benefits who are under age 67. If the earings test was designed such that all retirees earning up to $35,000 per year get to keep an annual benefit of $25,000 but a retiree lost $1 for every $4 earned over $35,000 per year: a. Graph an individual’s new budget constraint under the eamings test program where 2080 is the total hours worked per year and $60 is the individual's wage rate. Use the Neoclassical Model of the Labor-leisure ‘Trade-off labeling the values on the Y axis at all kinks, values on the X. axis at all kinks and the slopes of the constraint. (8 points) 1 1 po 4 3080 L b{ Iftomorrow, the earings test was eliminated, would he increase or decrease his hours worked if he was originally earning $60,000 per year #25 jodeacced 53] (Explain your reasoning using income and substitution effects) (6 points). at Loan + ee Fede Fe Easy 400,00 means consuming @ # ae ono Ons ee . = G3: (,4at - vicher 5 \ess $55 : (i Si Sgle ORR Cook of gure T>norts oe © “« . Would he iperease or decrease his hours worke'if he was originally earning $80, per year (Explain your reasoning using income and a WEA Ww substitution effects) (6 points). von al Tncatne clack - Serls. eicherd wots less xn 2H 0 Tren St ago S wWodtitlon eect - opp casbef Legace hs mae |. With all of this discussion of earnings tests, many believe that social security income doesn’t have a particularly large effect on retirement ages \od and work incentives. Explain one response to this question. (5 points) Kare D, well cxpraine a oes Full Oo ect & 8 is 8Economies 151A, Spring 2015 Dr. Janine L.F. Wilson 4, How do Ashenfelter and Heckman (1974) believe individuals determine their utility and budget constraints when determining how much labor to supply to the market? (8 points) a, Did they find that labor supply was very elastic to wage changes (please describe in detail)? Us FC Lae) C= (Te Lad)Wee (wed “Whey Found Peale. labs bor sugely ee Ct Ahoy Sound male * hes 56 elastic, cebele! b. Ifa study were done today, using 2015 data, with perfect aceuracy, given ‘what you know about current labor market trends, what would be the female labor supply elasticity? The male labor force elasticity? Explain your assurpptions in your explanation. female | labors ry) could Ps \es qa face ie most women! are part of the eee Hale \avorsuyply could ve marcela tie tt ay : , as 5. What assumptions of the life-cycle model are different from the neoclassical ‘model of labor leisure trade off? Give a graphical interpretation of the model id veAVon eee your explanation below. (6 points) ! wives Name: Student ID Number n ot LO 1 5° Pee the \Ke-ccle model wodel AsSumes vn axe ror surprised by Wade changes. al. Pecks at ankertempo pom sushi Cel \ ca, \s — romp \ veact vv Tycomnsy ans, Ooh Bad fnas epak ce