Tutorial 1
1. You currently work for 40 hours a week at wage rate of £12 an hour. Your free hours are
defined as the number of hours not in work, which in this case is 24 hours x 7 days - 40 hours =
128 hours per week. Suppose that you are happy to keep your total weekly income constant. Then:
a. If your wage rate increases to £16 an hour, then by how many percent will your free time
increase by?
b. A wage cut of 25% leaves you with how many hours of free time?
2. You are given the following table for a student's production function with the final grade (the
output) related to the number of hours spent studying (the input).
Fill in the the values of (a), (b), (c) and (d).
3. The figure shows the indifference curves of a student for the two 'goods' , free time and final
grade. Based on this information, explain why each of the following statements are true or false.
a. At A, the student is willing to give up 34 grade points for five extra hours of free time.
b. A is the student's most preferred choice as she would be attaining the highest grade.
c. The student strictly prefers a grade of 54 with 19 hours of free time to a grade of 67 with 18
hours of free time.
d. If at B the number of free hours is 10, then the student is 50% happier at A than at B
4. You have a choice between two 'goods' . Which of the following graphs can be an indifference
curve that represents strictly monotonic preferences (having more of a good is strictly better)?
5. You have two choices for how you are going to spend Saturday evening. You can go to the pub
with your friends, which will cost you £30 for the evening. The pleasure you anticipate from this
experience is worth £50 to you. Or you can go to the theatre The ticket will cost you £50, but you
value the experience at £60. Based on this information, answer the following questions:
a. What is the opportunity cost of an evening at the pub?
b. What is the economic cost of going to the pub?
c. What is the economic rent of going to the pub?
6. Suppose your budget constraint is c = w(24 - t) + m, where c is your maximum level of
consumption, w is your hourly wage, t is hours of leisure time, and m is income from your
investments. Assume m is strictly positive. If your budget constraint is drawn with with t on the
horizontal axis and c on the vertical axis, answer the following questions
a. What is the slope of your budget constraint curve? Is this slope diminishing as t increases?
b. What is the effect of lower wage rate on the budget constraint curve?
c. Draw the original budget constraint curve and situation described in (b) in one graph.
7. The figures show Alexei's production function and his corresponding feasible frontier for final
grade and hours of work or free time per day. They show the effect of an improvement in his
studying technique, represented by the tilting up of the two curves. Consider now two cases of
further changes in Alexei's study environment: Case A. He suddenly finds himself needing to
spend 4 hours a day caring for a family member. (You may assume that his marginal product of
labour is unaffected for the hours that he studies.) Case B. For health reasons his marginal product
of labour for all hours is reduced by 10%. Then:
a. How does Alexei’s production function changes in Case A and Case B?
8. Suppose that Alexei’s production function is given by
questions:
y=20 √ h . Answer the following
a. Show that the production function exhibits diminishing marginal product of labour.
b. Consider two cases. Case A: In a semester, Alexei doesn’t study at all in the first quarter, and then
he studies for 16 hours a day in the second quarter. Case B: Alexei studies for 8 hours in the first
and second quarters of the semester. Show that strategy in Case B is superior to that in Case A.
9. Figure 3.10a shows Alexei's feasible frontier and his indifference curves for final grade and
hours of free time per day. Suppose that all students have the same feasible frontier, but their
indifference curves may differ in shape and slope depending on their preferences. Use the diagram
to answer the following questions.
a. Which point will Alexei choose?
b. Another student, Thabo, faces the same problem as Alexei: He cares about free time and grades.
What point is he going to choose on the diagram? Explain.
10. The following diagram depicts the effect of the change in wage level on a worker's choice of
consumption and hours of free time. The choice before and after the wage rise are given by A and
D, respectively. Based on this information, answer the following question.
a. Show the income and substitution effects.