Participating in labor market-for leisure-budget constraint

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Reference no: EM13734256

Cara has available h = 3000 hours per year for participating in the labor market and for leisure. She gets a wage w = $18 for the first 2,000 hours of work. If she works more than that, the wage on the additional hours is increased by 50%. She receives dividend income of = 3000 and pays a tax of T = 2000.

(a) Plot her budget constraint.

(b) Cara works 2,200 hours per year. Assuming her choice is optimal, demonstrate on a graph. What is her MRS?

(c) Cara's stocks are doing well and his dividend income went up by $1,000. She chose to work 1,800 hours. It is surprising that a relatively small change in income led to a big change in hours worked. Explain graphically.

Reference no: EM13734256

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