Question

Question 1: Labour Supply (25 marks) Melissa is a working mother of two living in Brazil. She has preferences over labour and leisure described by the following utility function: U = (C – 100)2_2 Melissa can earn 2 Brazilian Reals an hour, and can spend a maximum of 100 hours per week working. Melissa's wage is quite low in purchasing power. For example, a can of coke costs around 3 Brazilian Reals. a) How much time does Melissa spend working per week? Show your working. Note that her marginal utility of consumption is MU¢ = {(C – 100) ŽL and her marginality utility of leisure is MU= c = 100k 3 5 marks In 2004 the Brazilian Government implemented a basic income for low income workers as part of the Bolsa Familia welfare program. The income is low but intended to be sufficient to cover basic needs. b) Bolsa Familia comes into effect and gives Melissa an unconditional income of 100 Reals per week. She receives this income regardless of whether she works or not. i) Draw Melissa's budget constraint before and after the program is introduced. Be sure to label both axes and intercepts. ii) How much time does Melissa spend working now? Show your working. 111) How much money would the government have to give Melissa for her to stop working altogether? Show your working. iv) Suppose Melissa's wage drops to 1 Real. Will she still work? Show your working. (Hint: what is her reservation wage?) 5 marks each

Answer 1

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