Question

Many college students work to pay for school expenses, e.g., tuition, texbooks, etc. Suppose it is well known that college students who work a part-time job obtain a lower GPA than those who don’t (because they have less time for studying). Considering GPA is one of the important criteria for future employment, doing part-time work can be interpreted as an increase in current income at the cost of reduced income in the future.

1. Using our standard leisure-consumption graph, show how college students’ labor supply decisions are affected by the harm they cause to their GPA. (Hint: Think of “study time” as leisure–the time you are not working. For every hour that a student is working and hence cannot study, they bear a cost in terms of reduced future income. This is like a tax on their current earnings of $z per hour).

2. What is the effect of having to pay a $z tax on current earnings on the labor force participation rate of college students?

3. The government is considering giving a lump-sum amount to every college student regardless of how much they work. What does this reveal about whether the government believes college students should be working more or less?

Answer 1

Ans (1) the graph of leisure consumption:

As shown in the diagram as more and more leisure increase the consumption of future will decrease for eg if only 2 unit of leisure (study time not used for study ) this will lead to 300 unit of consumption in future while if leisure is increased then the consumption will reduce as a result only 150 unit of consumption can get by 4 unit of leisure now there is inverse relationship between consumption and leisure. As more and more time devoted for part time job then less time will be left for studies and as a result the total consumption will decrease in future.

Ans (2) The net effect of introducing of $Zas tax on current income then the labour force participation will decrease because of increase in tax on earning as a result leisure will decrease ie the study time will increase and part time job participation will decrease because the tax is introduced on the current income by this introduction the future income will increase.

Ans (3) If government is giving a lump sum amount to every student then the college student should be working less because government is considering their pat time job so that a student can devote more time on studies rather then on job. By this government is believing that a student should work hard now in terms of future income.