Q1. Ahmed must decide how much to work.

He has 60 hours per week available that he can spend

either working or engaged in leisure). He can work at a wage of Rs.15 per hour. Asif who is
Ahmed’s uncle also gives him an allowance of Rs.100 per week, no matter how much Ahmed
works. Ahmed’s only source of income that he can use for consumption is this allowance plus his
wage earnings. In a carefully labeled diagram, draw Ahmed’s consumption-leisure budget
constraint. Show an equilibrium where Ahmed chooses to work 40 hours per week.

Q2. Faisal gains utility by consuming “V” amount of work and “L” amount of leisure. The most
leisure he can consume in any given week is 168 hours. His utility function is U (V, L) = V*L.
This implies that his MRs is V/L. He receives Rs.700 each week from his Father regardless of how
much he works. What is Faisal’s reservation wage?

Q3. An individual consumer has an income stream (Y0, Y1) and can borrow and lend at the interest
rate i. For each of the following data points, determine whether the consumption stream (C0, C1)
satisfies the intertemporal budget constraint.

Draw a graph to illustrate your answer in each case.

Q4. Rahim consumes (c1, c2) and earns (m1, m2) in periods 1 and 2 respectively. Suppose the
interest rate is r.
a) Write down Rahim’s intertemporal budget constraint in present value terms.
b) If Rahim does not consume anything in period 1, what is the most he can consume in period
2?
c) If Rahim does not consume anything in period 2, what is the most he can consume in period
1?
d) What is the Slope of Rahim’s budget line?