Problem 1: Shelly's preferences for consumption and leisure can be expressed asU(C, L) = (C - 200) * (L - 80). There are 168 hours in the week availableto split between work and leisure. Shelly earns $5 per hour after taxes. She alsoreceives $320 worth of welfare benefits each week regardless of how much she works.
a. Graph Shelly's budget line.
b. What is Shelly's marginal rate of substitution when L =100 and she is on herbudget line?
c. What is Shelly's reservation wage?
d. Find Shelly's optimal amount of consumption and leisure.
e. If her wage increases to $10 per hour after tax, where is her new optimal amount of consumption and leisure? Graph her new budget line and show the substitution and income effect. Which one dominates?
f. Which effect becomes more likely to dominate once the welfare benefits increase? (Hint: show a relationship between leisure and welfare benefits)
Problem 2: Suppose you want to measure the impact of low skilled workers in the labor market generated by an increase in the minimum wage. To do so, you're going to use the D-I-D methodology. Use the following information to design your experiment.
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US states
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Minimum wage before 1980
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After new legislation (January 1980)
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Minnesota
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$3 per hour
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$4 per hour
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California
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$3 per hour
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$3 per hour
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Wisconsin
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$3 per hour
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$4 per hour
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a) Which kind of data would you collect to do your experiment?
b) What could be a potential problem threatening the robustness of your results?
c) If you were God and could choose the design of the legislation. How would you do it to make sure you're going to get the accurate effect of the increase of minimum wage on low skilled workers participation?