Econ339 Asmt No.2

Economics 339, A01, CRN 12913 Assignment 2 Dr. L. Welling November 16, 2012 Assignments are due at the beginning of class on the due date. Remember to use at least ½ page for each diagram. 1. (25 marks) Juanita derives utility from both leisure (L) and food (G). She has 18 hours per day which she can divide between leisure and preparing meals (H). Her ability to prepare meals is described by the function G=g(H;X), and displays positive but diminishing marginal productivity of H. a) (4 marks) In a diagram with leisure on the horizontal axis, sketch Juanita’s consumption set (her feasible combinations of food and leisure). b) (2 marks) What is the economic interpretation of the slope of the feasible set? Ans: slope gives the (negative of the) opportunity cost of a unit of leisure time, in terms of food: the number of units of food which must be given up if Juanita spends an additional hour in leisure rather than preparing food. c) (4 marks) Juanita chooses to spend one-quarter of her time in leisure. In the diagram in (a), show that this is her optimal choice, and indicate the division of her time. Ans: need an indifference curve tangent to the budget line at leisure = 18/4 = 4.5. Remainder of time is spent in home production. Now suppose that Juanita is able to engage in paid employment as well as leisure and homework. Paid employment offers her a wage of $12 per hour; with this income she can purchase food at a unit price of $6.00. If Juanita spends all her time producing food at home, she can produce 15 units of food; her first unit of time spent in home production produces more than two units of food. d) (5 marks) In a new diagram, illustrate the feasible set that Juanita faces now. Identify her optimal time allocation and explain how you determined this. Ans: optimal amount of leisure is determined by the tangency of an indifference curve and the boundary of the new feasible set (the new “budget line”). If Juanita spends some time in the market as well as in