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MICRO 2 Assignment 2

This document contains 4 questions related to consumption-leisure choices and intertemporal budget constraints. Question 1 asks to draw the consumption-leisure budget constraint for an individual who can work up to 60 hours per week at Rs. 15 per hour and receives a Rs. 100 weekly allowance, showing an equilibrium where he works 40 hours. Question 2 asks to calculate an individual's reservation wage given his utility function and income. Question 3 asks to determine if given consumption streams satisfy the intertemporal budget constraint for different income streams and interest rates. Question 4 asks about an individual's two period intertemporal budget constraint in present value terms and properties of the budget line.

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Talha Ahmed
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54 views

MICRO 2 Assignment 2

This document contains 4 questions related to consumption-leisure choices and intertemporal budget constraints. Question 1 asks to draw the consumption-leisure budget constraint for an individual who can work up to 60 hours per week at Rs. 15 per hour and receives a Rs. 100 weekly allowance, showing an equilibrium where he works 40 hours. Question 2 asks to calculate an individual's reservation wage given his utility function and income. Question 3 asks to determine if given consumption streams satisfy the intertemporal budget constraint for different income streams and interest rates. Question 4 asks about an individual's two period intertemporal budget constraint in present value terms and properties of the budget line.

Uploaded by

Talha Ahmed
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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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?

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