Peggy is a single mother who currently does not work and has a two year-old child named Bud. Peggy’s concerned parents give her $30/day (non-labor income) to support her and Bud. Peggy has just interviewed for a job as a cashier at Whole Food’s grocery store. They are willing to hire her at a wage of $8/hour. If Peggy takes the job, she will have to pay $20/day for childcare while she is at work. This question concerns Peggy’s decision on whether to take the job.
A) Suppose that Peggy can work at most 12 hours in a day and that if Peggy works even one hour she has to pay the $20 in childcare for Bud. Draw Peggy’s effective budget constraint if she took the Whole Food’s job at $8/hour. Now draw her indifference curve through her chosen point of not working which is consistent with what her preferences must be given that she chooses not to work at the current offered wage.
B) For the indifference curve you have drawn, show graphically Peggy’s reservation wage. Would she be more likely or less likely to take the job if her indifference curve was flatter than the one you have drawn? What does a flatter indifference curve imply about Peggy’s relative marginal utility of leisure? Suppose Whole Food’s decides to offer free child care on the premises but did not change the wage they offered Peggy. Draw Peggy’s new budget constraint. Is she more or less likely to take the job now?
C) Suppose Marge, Peggy’s friend, was willing to work for Whole Food’s at $7/hour. What might this imply about the shape of Marge’s indifference curves (i.e., her tastes) relative to Peggy’s? Is this necessarily the case? Explain