Question

13 Differences in wage levels. Suppose individual A received a much better education than individual B, and consequently earns twice as much per hour of labor. a If both individuals work 40 hours a week, who will have greater H? Why? b If both individuals work enough hours so as to earn exactly $50,000 per year, who will have greater H'? Why? c Draw a set of axes labeled T and TZ that resemble Figure 3.8. Draw a line labeled A that shows individual A's time constraint during a given period (say, one month), and draw another time constraint for individual B. Explain why and how they differ due to choices in previous periods. d On this same set of axes, draw representative indifference curves for both indi- vidual A and individual B, including ones that lie tangent to their respective time constraints. Based on the way you drew your curves, does individual A earn less than twice as much or more than twice as much as individual B? e Explain briefly why your answer to Exercise 13(a) may change if you found out that individual A had to spend ten times as many hours on homework during her schooling years as individual B did. Explain why it is optimal for individual B to invest less in health when she is already less healthy than A. Why does she not invest more to "catch up"? f

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Answer 1

When an individual A has higher level of education than the individual B, it is logical to believe that he earns more. Thus, individual A earns twice as much as individual B.

(a) If both individuals work 40 hours a week, A will earn twice the income earned by B and so he is expected to spend more on health than B. Thus, A will have a higher optimal level of health H*

(b) If both individuals work enough hours to exactly earn $50 000 per year, A must be working less to earn the same amount and so he has more time to take leisure and rejuvenate. Hence A will have greater H*

(c) Below is the Labor-Leisure graph, containing individual A and B’s time constraint and their respective indifference curves. They both differ as A enjoys more leisure, earns more income and has, therefore, a better standards for health.

Consumption Budget line for A Budget line for B C2 ICA C1 ICB L1 L2 Leisure