Deck 3: Economic Circumstances in Labor and Financial Markets

Question 1

A decrease in a wage taxes causes the opportunity cost of leisure to increase.

Answer 1

True
The opportunity cost of leisure is how much a worker gives up by taking leisure.If the wage tax falls,the worker gives up more when he does not work.

Question 2

Since interest rates for borrowing are usually higher than interest rates for savings,the intertemporal budget constraint has an inward kink for individuals that earn income now and in the future.

Answer 2

False
Individuals who earn income both now and in the future have an endowment bundle that lies in the interior of our current consumption/future consumption graph.Anywhere to the left of this,they save -- and anywhere to the right of it they borrow.If interest rates on saving are lower than on borrowing,this implies that the budget will be shallow initially and then gets steep when borrowing commences.The kink therefore points out,not in.

Question 3

Progressive wage taxes cause worker leisure/consumption budgets (with leisure on the horizontal axis)to become steeper as leisure increases.

Answer 3

False
Regressive wage taxes levy high rates on initial hours worked and lower rates on later hours -- which implies that,beginning at the leisure endowment point,the budget starts shallow and becomes steeper as we move to the left.Thus,as we move in the other direction (of leisure increasing),the budget becomes shallower.

Question 4

In the typical leisure/consumption model,an increase in the wage is equivalent to a decrease in the price of the composite consumption good.

Question 5

An increase in the interest rate is an increase in the opportunity cost of consuming in the future.

Question 6

Suppose a worker gets a weekly check equal to $1,000 from a risk-free investment,has 60 hours of weekly leisure that can be devoted to work and can earn a wage of $40 per hour.
a.Illustrate this worker's budget constraint,with weekly leisure hours on the horizontal and weekly consumption (in dollars)on the vertical.
b Illustrate what happens to this worker's budget constraint when the weekly investment check increases to $1,500.
c.Illustrate what happens to this worker's budget constraint when instead the wage increases to $50 per hour.
d.Suppose the worker can hire help at $20 per hour,and each hour of help adds a half an hour to his available leisure.Will the budget constraint described in (a)change?

Question 7

A bond will pay $10,000 to its owner in 5 years.If the relevant annual interest rate is 5%,what is the bond worth today (rounded to the nearest 100)?
a.
$9,500
b.
$7,800
c.
$6,600
d.
$1,900
e.
None of the above.

Question 8

The opportunity cost of current consumption differs for borrowers and savers only if the interest rate for savers differs from the interest rate for borrowers.

Question 9

A bond that promises to pay $X in 10 years must be worth less than $X now.

Question 10

Changes in interest rates cause the same rotations of intertemporal budget lines regardless of whether you are a borrower or a saver.

Question 11

Write down the budget constraint equation as well as the choice set for a worker who has 100 possible hours of leisure per week and can earn a wage of $25 per hour.

Question 12

In the worker's leisure/consumption model,the wage is the same as the price of consumption.