3.) You own a small farm near a large city, and
you are about to decide whether to work on that small farm or work
at a job in the city. Your utility depends on your income per day
(Y) and on hours of leisure (L). Assume that you have 8 hours each
day to devote to work. Your daily income from farm work

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Question: 3.) You own a small farm near a large city, and you are about to decide whether to work on that s…
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Yf = 20hf hf2
where hf is hours of work on the farm, and
your daily income from the city job is:

Yc = 14hc

where hc is hours of
work in the city.

a) If you can work either on the farm or in the
city, but not both, which sector would you choose? b) If you can
work both on the farm and in the city, how would you allocate your

5.) Thomas Alexander is considering living in
Los Angeles or Eugene. If he works in L.A. his real wage will be
$10 an hour and he will face a 2 hour commute time per day. If he
lives in Eugene, his real wage will be $5 an hour, and he will
effectively have no commute time. In addition, Thomas has a trust
fund that, because of cost of living differences between the two
localities, pays him $15 per day if he works in L.A. and $12 per
day if he works in Eugene. Thomas has 17 hours in the day to work
or leisure regardless of the location he chooses.

a) Draw, on the same graph, the two budget
constraints that Thomas faces for his location choices. Clearly
indicate the city and other important aspects of the budget
constraint on the graph.
b) Suppose that it is known that Thomas’s utility maximizing number
of hours of leisure is 12.4 if he works in Eugene. Indicate this
result on you graph in part a (above) and show that Thomas’s
utility maximizing hours of leisure is lower if he works in

c) Provide some intuition about the economic
incentives that lead Thomas to leisure less if he works in L.A. In
particular, focus on the various income and substitution

7.) Using the multiple regression results
below, answer the questions that follow (standard errors are in
parenthesis below coefficient estimates). Assume that savings per
year is in dollars, Y is annual income from salary, ED is years of
education completed, and F indicates a female

Savings per year ? 150 .5 ?
0.15( Y ) ? 50.90( ED
? 222
.45( F ) ? ? (20.6) (0.005) (35.80) (52.68)

a) Interpret the coefficient estimate on
b) Which independent variables are statistically significant? How
do you know this? c) What is the marginal propensity to save (MPS)?
Consume (MPC)?

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