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Economics 308 Chapter 2

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Information about Economics 308 Chapter 2
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Published on July 9, 2007

Author: Spidermann

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Economics 308:  Economics 308 Managerial Economics Chapter 2 The Economist’s View of Behavior:  The Economist’s View of Behavior We live in a world of scarcity. Individuals make the best choices they can, subject to constraints imposed by the nature of the world. cognitive limitations resource scarcity costly (and imperfect) information Human existence can be characterized by a series of decisions where a person must allocate a scarce resource between competing uses. The 'correct' answer to many decisions can be made by 'thinking at the margin.' The cost of many choices can be measured using the idea of opportunity cost. Representing the Economists view of the world on a graph:  Representing the Economists view of the world on a graph Utility Function: Utility = f(Food, Clothing) Indifference curves are a graph of a person’s utility function. Given a utility function U=f(X,Y) Indifference curves portray the marginal tradeoffs between X and Y that maintain a constant U Indifference curves:  Indifference curves Indifference curves show combinations of two goods that yield equal utility, i.e. make a person equally happy. Any combination of the two goods on the same indifference curve yield the same utility for an individual. If given a choice between the two combinations, the individual doesn’t care which he receives. A B Indifference curves:  Indifference curves If there is a change in the world or the individual can make a choice which moves him to a higher indifference curve, the individual will be better off as a result of that change in the world or the choice he made. Moving to a higher IC makes a person happier. A C Indifference curves:  Indifference curves The slope of the IC captures an individuals preferences between two goods. The slope of the IC measures how much an individual values units of the good or, alternatively, how much enjoyment he gets from consuming a unit of the good. The person would be willing to give up one unit of clothing for one unit of food. A B Slope=rise/run =9/9 =1 Indifference curves:  Indifference curves Consider the rotation of the IC from red to blue. What has happened to the slope of the IC? The slope has changed from 1 to .43 What does this say about the individual’s preferences between clothing and food? What has happened to the value of clothing to the person? If you take away one unit of clothing, you must give the person .43 units of food to compensate him for the loss therefore, clothing has become less valuable to the person. A B D Slope=rise/run =9/21 =.43 The Budget Constraint:  The Budget Constraint The budget constraint depicts the combinations of two goods an individual can afford with a given income and given the price of two goods. I  PfF + PcC (I=income, P=price of good, F and C =quantity of good) which can be rearranged as F  I/Pf - (Pc/Pf)C and this can be drawn as … The Budget Constraint:  The Budget Constraint The budget constraint shows combinations of two goods that can be purchased with a given income. Bundles of goods inside the budget constraint are attainable and those outside the budget constraint are unattainable. ds Shifting the budget constraint:  Shifting the budget constraint Changes in Income An increase in income is depicted as a parallel shift of the budget constraint out from the origin. A decrease in income is depicted as a parallel shift of the budget constraint in toward the origin. Changing a price:  Changing a price A change in the price of a good is depicted as a rotation or change in the slope of the budget constraint. An increase in the price of the good on the horizontal axis depicted as a rotation of the budget constraint which increases its’ slope. An decrease in the price of the good on the horizontal axis depicted as a rotation of the budget constraint which decreases its’ slope. Combining indifference curves and the budget constraint:  Combining indifference curves and the budget constraint An individual will choose the combination of goods among those attainable that yield the highest utility. An individual will choose the point on the budget constraint that is on the highest possible indifference curve. An individual will move to the point where an IC is tangent to the budget constraint. How a change in income will affect the bundle of goods chosen by a person. :  How a change in income will affect the bundle of goods chosen by a person. An increase in income shifts the budget constraint outward. The consumer is able to choose a better combination of goods on a higher indifference curve. Normal vs. Inferior Goods. What happens to demand when income increases?:  What happens to demand when income increases? What happens to demand when income increases, inferior or normal?:  What happens to demand when income increases, inferior or normal? Mercedes sl55 AMG-$125,000 What happens to demand when income increases, inferior or normal?:  What happens to demand when income increases, inferior or normal? Prada Camel Textured Bad-$980 Guess Sienna Asymmetrical Handbad-$85 Changes in Income Affect Consumer Choices:  0 Which point on the budget line will be chosen? Changes in Income Affect Consumer Choices Changes in Income Affect Consumer Choices:  0 I1 Will the increase in income cause a shift in the BL or the IC? What will be the nature of the shift. Changes in Income Affect Consumer Choices Changes in Income Affect Consumer Choices:  0 New budget constraint I1 Which point on the budget line will be chosen? Changes in Income Affect Consumer Choices Changes in Income Affect Consumer Choices:  Changes in Income Affect Consumer Choices 0 New optimum New budget constraint I1 I2 Changes in Income Affect Consumer Choices:  Changes in Income Affect Consumer Choices 0 New optimum New budget constraint I1 I2 1. An increase in income shifts the budget constraint outward… Changes in Income Affect Consumer Choices:  Changes in Income Affect Consumer Choices 0 New optimum New budget constraint I1 I2 1. An increase in income shifts the budget constraint outward… 2. …raising pizza consumption… Changes in Income Affect Consumer Choices:  Changes in Income Affect Consumer Choices 0 New optimum New budget constraint I1 I2 1. An increase in income shifts the budget constraint outward… 3. …and Pepsi consumption. 2. …raising pizza consumption… An increase in income can cause consumption of a good to go down. :  An increase in income can cause consumption of a good to go down. Quantity of Pizza Quantity of Pepsi 0 Initial optimum I1 Suppose there was a increase in income. How would the budget line shift? An increase in income can cause consumption of a good to go down. :  Quantity of Pizza Quantity of Pepsi 0 New budget constraint I1 Initial optimum An increase in income can cause consumption of a good to go down. An increase in income can cause consumption of a good to go down. :  Quantity of Pizza Quantity of Pepsi 0 Initial optimum New budget constraint I1 I2 An increase in income can cause consumption of a good to go down. An increase in income can cause consumption of a good to go down. :  Quantity of Pizza Quantity of Pepsi 0 Initial optimum New optimum New budget constraint I1 I2 An increase in income can cause consumption of a good to go down. An increase in income can cause consumption of a good to go down. :  Quantity of Pizza Quantity of Pepsi 0 New optimum New budget constraint I1 I2 1. When an increase in income shifts the budget constraint outward... Initial optimum An increase in income can cause consumption of a good to go down. An increase in income can cause consumption of a good to go down. :  Quantity of Pizza Quantity of Pepsi 0 Initial optimum New optimum New budget constraint I1 I2 1. When an increase in income shifts the budget constraint outward... 2. ... pizza consumption rises, making pizza a normal good... An increase in income can cause consumption of a good to go down. An increase in income can cause consumption of a good to go down. :  Quantity of Pizza Quantity of Pepsi 0 Initial optimum New optimum New budget constraint I1 I2 1. When an increase in income shifts the budget constraint outward... 3. ... but Pepsi consumption falls, making Pepsi an inferior good. 2. ... pizza consumption rises, making pizza a normal good... An increase in income can cause consumption of a good to go down. How a change in prices affects the bundle of goods chosen by a person. :  How a change in prices affects the bundle of goods chosen by a person. An change in price rotates the budget constraint. The effect on the demand and consumption of a related good depends on whether two goods are substitutes or complements. What happens to demand when the price of a related good changes?:  What happens to demand when the price of a related good changes? 2005 Suzuki GSXR-1000 $10,849, 176 HP, 370 lbs. , 2.1 lbs. per HP, sub 10 sec ¼ mile. A Ford F-150 pickup would require over 1700hp to achieve the same acceleration. What happens to demand when the price of a related good changes?:  What happens to demand when the price of a related good changes? Ducati 999 $18,000, 139 hp, 425 lbs., 3.1 lbs. per HP Slide34:  What happens to demand when the price of a related good changes?:  What happens to demand when the price of a related good changes? Glock 9mm Pistol, $550 What happens to demand when the price of a related good changes?:  What happens to demand when the price of a related good changes? Prada Suede Flap Hobo Bag $890 Slide37:  What happens to demand when the price of a related good changes? Prada Bow Trim Ankle-strap Pump $460.00 What happens when the price of one good changes?:  What happens when the price of one good changes? Changes in Prices Affect Consumer Choices:  Changes in Prices Affect Consumer Choices Quantity of Pizza 100 Quantity of Pepsi 500 0 I1 Initial optimum Initial budget constraint Changes in Prices Affect Consumer Choices:  Changes in Prices Affect Consumer Choices Quantity of Pizza 100 Quantity of Pepsi 500 0 I1 1. A fall in the price of Pepsi rotates the budget constraint outward… Initial budget constraint Changes in Prices Affect Consumer Choices:  Changes in Prices Affect Consumer Choices Quantity of Pizza 100 Quantity of Pepsi 1,000 500 0 I1 New budget constraint 1. A fall in the price of Pepsi rotates the budget constraint outward… Initial budget constraint Changes in Prices Affect Consumer Choices:  Changes in Prices Affect Consumer Choices Quantity of Pizza 100 Quantity of Pepsi 1,000 500 0 New optimum I1 I2 New budget constraint 1. A fall in the price of Pepsi rotates the budget constraint outward… Initial budget constraint Changes in Prices Affect Consumer Choices:  Changes in Prices Affect Consumer Choices Quantity of Pizza 100 Quantity of Pepsi 1,000 500 0 New optimum I1 I2 New budget constraint 1. A fall in the price of Pepsi rotates the budget constraint outward… 2. …reducing pizza consumption… Initial budget constraint Changes in Prices Affect Consumer Choices:  Changes in Prices Affect Consumer Choices Quantity of Pizza 100 Quantity of Pepsi 1,000 500 0 New optimum I1 I2 New budget constraint 1. A fall in the price of Pepsi rotates the budget constraint outward… 2. …reducing pizza consumption… 3. …and raising Pepsi consumption. Initial budget constraint Changes in Prices Affect Consumer Choices:  Changes in Prices Affect Consumer Choices Quantity of Pizza 100 Quantity of Pepsi 1,000 500 0 A I1 I2 B A change in the price of good can cause the demand for a related good to increase of decrease depending on whether the goods are complements or substitutes. Which point A or B depicts two goods which are complements and which depicts two goods which are substitutes? A-substitutes, B-complements Budget Line and Indifference Curve Analysis: Example 1.:  Budget Line and Indifference Curve Analysis: Example 1. Budget lines and indifference curves are flexible analytical tools that can be used to analyze many questions. Example: Analyzing how changes in the way workers are compensated can change worker behavior. Slide47:  Hours of Leisure Per Day 0 Consumption Per Day 16 $240 24 The first step in any analysis using budget lines and indifference curves is deciding what goes on the axes. The second step is to show the change in the world as a shift in budget lines or indifference curves. Consider the question of how much a person works each day. How may hours of leisure will the person consumes if he works 8 hours a day? If he works 24 hours a day, how much consumption or income can the person earn? If he works 8 hours a day, how much consumption or income will he have? $80 Sample Exam Problem Part 1:  Sample Exam Problem Part 1 Consider a person who chooses to work 8 hours a day 5 days a week. Draw the weekly budget line between leisure and consumption if his hourly wage is $10 per hour. Put values on the horizontal and vertical intercepts of the budget line and on the combination of consumption and leisure chosen by the person. Depict the effect of an increase in the person’s wage to $20 per hour, if after the increase he works and additional 8 hours each weak. Is it possible that the person would work fewer hours after the wage increase? Depict on your graph and provide a short explanation of how this could occur. Slide49:  Consider a person who chooses to work 8 hours a day 5 days a week. Draw the weekly budget line between leisure and consumption if his hourly wage is $10 per hour. Put values on the horizontal and vertical intercepts of the budget line and on the combination of consumption and leisure chosen by the person. Depict the effect of an increase in the person’s wage to $20 per hour, if after the increase he works and additional 8 hours each weak. Is it possible that the person would work fewer hours after the wage increase? Depict on your graph and provide a short explanation of how this could occur. Slide50:  Hours of Leisure Per Week 0 Consumption Per Week 128=168-40 $1680=168*$10 168=24*7 The increase in the hourly wage will cause a rotation of the budget line. Will the increase in the hourly wage cause an increase in work effort? Is it possible that the increase in the hourly wage will cause a decrease in work effort? What has happened to consumption/income in both cases? $400 $3360=168*$20 120 $960 A B Sample Exam Problem Part 2:  Sample Exam Problem Part 2 Consider a person who chooses to work 8 hours a day 5 days a week. Draw the weekly budget line between leisure and consumption if his hourly wage is $15 per hour. Put values on the horizontal and vertical intercepts of the budget line and on the combination of consumption and leisure chosen by the person. Suppose the worker receives a lump sum bonus for exceptional work performance of $300. Depict the effect of the bonus on the person’s work effort. Is it possible that the person would work fewer hours after the receiving the bonus? Depict on your graph and provide a short explanation of how this could occur. Slide52:  Consider a person who chooses to work 8 hours a day 5 days a week. Draw the weekly budget line between leisure and consumption if his hourly wage is $15 per hour. Put values on the horizontal and vertical intercepts of the budget line and on the combination of consumption and leisure chosen by the person. Suppose the worker receives a lump sum bonus for exceptional work performance of $300. Depict the effect of the bonus on the person’s work effort. Is it possible that the person would work fewer hours after the receiving the bonus? Depict on your graph and provide a short explanation of how this could occur. Slide53:  Hours of Leisure 0 Consumption 128 $2520 168 The bonus causes an semi-parallel shift out of the budget constraint (blue line). At point A, the person is working more hours after receiving the bonus. At point B, the person is working fewer hours after receiving the bonus. Whether a person moves to A or B after receiving a bonus depends on how his consumption of leisure responds to an increase in income. $600 $2520+ 300 A B $300 Slide54:  Hours of Leisure 0 Consumption 128 $2475 168 The previous examples analyzed the effect of a change in income i.e. a shift in the budgel line. How do you analyze a change in preferences, i.e. a rotation of a person’s indifference curve? What would happen if the person: Got pregnant or wife got pregnant. Doctor told him he was terminally ill. Etc. Purple to Red or Red to Purple Husband or wife? $600 Slide55:  Painless Paternity Tests, but the Truth May Hurt By MIREYA NAVARRO JOSEPH DIXON said he was not exactly thrilled when his girlfriend of one and a half years told him she was pregnant. But, Mr. Dixon said, he did not want her to have an abortion and was determined to do the right thing. 'I told her I'd definitely be there' for her, said Mr. Dixon, 29, a hotel doorman in Chicago. And he was. The two didn't marry but settled into the common rhythm of separate but shared parenthood, he said, allowing him to see his daughter whenever he wanted. But when Mr. Dixon arranged to purchase a life insurance policy to give his 4-year-old daughter financial security last January, the results of a required DNA test delivered stunning news. 'The probability of paternity is 0%,' the results read. He was not his daughter's biological father. Like an increasing number of men, Mr. Dixon found his life spun around as the result of a paternity test. There was shock, then deep hurt and finally a realization. 'I never had any idea she'd been cheating,' Mr. Dixon said of his ex-girlfriend. 'We knew each other, at least I thought.' With costs of paternity testing down - to $500 or less per test from nearly $1,000 just 10 years ago - and with the testing so simple it can be done at home (a swab from inside the cheeks does the job), DNA testing has become more common to settle legal disputes and questions about identity. A survey by the American Association of Blood Banks showed that more than 354,000 tests to establish parentage were performed in 2003, compared with about 149,100 in 1995. Caroline Caskey, chief executive officer of Identigene, a DNA testing company in Houston that has advertised its services nationally in magazines and billboards, said that in about 30 percent of the paternity tests the presumed father turns out to be not the biological father, and that is consistent throughout the industry. Although the tests ostensibly offer clarity, those who are left to wrestle with the results find themselves in unchartered emotional terrain from the moment the question of a test is raised, lawyers who specialize in family law say. After all, merely suggesting a paternity test could poison a relationship forever. If the results are negative, the emotional consequences could be life-shattering for everyone concerned. Men like Mr. Dixon said they had no reason to doubt the women. But other men are reluctant to take a DNA test even when they are in the middle of legal battles over children and their lawyer suggests they confirm paternity as a first step. Some even flat out refuse. 'It's a cultural taboo in this country,' said Jeffery M. Leving, a lawyer and fathers' rights advocate in Chicago. 'It's very unmanly to request a DNA test to determine that your child is your biological child. It's emasculating and many men would not do it.' Slide56:  Paternity tests have been a staple of tabloids and popular entertainment for years. The designer and supermodel Elizabeth Hurley had a nasty public spat with her ex-boyfriend, the Hollywood producer Stephen Bing, before a DNA test proved he was the father of her child. A DNA test is what apparently led the actor Robert Blake to marry Bonny Lee Bakely, who bore his child and later was murdered in a car outside restaurant in the Studio City neighborhood of Los Angeles. . And now there is Amber Frey, the 'other woman' in the Laci Peterson murder case. She recently acknowledged that a DNA test proved the man who was paying child support for the older of her two children was not the child's father. Even the two-timing Gabrielle in 'Desperate Housewives' has just added a new wrinkle to the show's already tangled plot line with a case of paternity deception: she gave fake test results to her husband, who asked for the DNA evidence because he suspects the baby his wife is carrying may be the gardener's. In any case where paternity is in dispute - no one knows exactly how many - the issues can be so jarring some of the men interviewed for this article had trouble speaking or broke into tears when recounting their experience. Dr. Enrique Terrazas, 39, a clinical pathologist from California, said his ex-wife eventually told him that one of his two children was not his child. His second wife had urged him to do the test because of a lack of resemblance between father and the child. In his view, what kind of person would have asked his own wife for a DNA test? 'It's like prenuptials,' he said. 'If you ask, it can be interpreted as saying 'I don't trust you,' or 'I want to protect my interest.' Unless you suspect infidelity and unless you have seen proof, to say I want a DNA test you're basically saying, 'You're cheating on me.' ' Dr. Terrazas cried on the telephone as he recounted the fallout. Because of the resulting dispute over child support payments, he said, he no longer sees his child regularly. His ex-wife's current husband is in the process of adopting the child. He said that his relationship with the child 'has been destroyed.' Dr. Terrazas's former wife answered a request for an interview with an e-mail message that said, 'I do not want anything to do with any media coverage that focuses adversely' on her children. It is the fallout faced by the children, most child advocates and lawyers say, that is most traumatic. And the men who seek to halt child support payments - an act many of them say is an attempt to right a wrong, rather than to abandon the children they still care about - are surprised to learn that they are still required by many courts to continue to pay because it is deemed in the best interest of the child, especially if the man is the only father that child has ever known. Some men have organized groups like the United States Citizens Against Paternity Fraud (www.paternityfraud.com) to call for mandatory DNA testing at the time of birth and laws that exempt men from child support if they are proven not to be the biological father. 'It's really a lose-lose situation,' Debbie Kline, executive director of the Association for Children for Enforcement of Support, a child support advocacy organization, said of the situations when parentage isn't determined until long after birth. 'And for the children, if this man is removed from the child's life, it's going to be devastating.' Slide57:  To prevent grief down the line, Mr. Leving said he recommends that his clients get a DNA test if they have a child out of wedlock. Other lawyers say men should think about the test even within a marriage if there's suspicion of an affair or any circumstance that does not pass 'the smell test.' 'I think the real bottom line is that for a few hundred dollars you can buy peace of mind that the child is yours,' said Randall M. Kessler, a family law lawyer in Atlanta. Still, most men resort to DNA testing only when they are pushed. Lawyers like Mr. Leving say clients often request the test when they are being denied visitation rights and become suspicious of the reasons. In other instances friends or relatives - and often a current girlfriend or wife - might raise suspicion that a child is not theirs, or the mother herself might blurt it out. 'It happens in the heat of an argument, and the woman goes, 'You're not even the father of the child!' ' said Taron James, who formed the group Veterans Fighting Paternity Fraud in California in 2002 after he fought for years to stop child support payments for a child that was not his. In the most recent case to make headlines, Ms. Frey went to court to set aside the paternity judgment against the man who was paying child support for her 4-year-old daughter and attached the results of a DNA test that showed the girl's father was actually someone else. Gloria Allred, the lawyer for Ms. Frey, said her client had believed 'in good faith' that the man paying child support was the girl's father and argued that while women obviously have the responsibility to establish who the father is, so do men. 'Any man who's alleged to be the father of a child born outside of marriage is entitled to take that DNA test' to establish paternity, she said. 'If he did not take the test, then he needs to take responsibility for his failure to do so. He shouldn't blame the mother.' But Glenn Wilson, who represents Anthony Flores, the child's presumed father, countered that unlike his client, 'she knew who she had sex with.' 'They were in what he thought was a monogamous relationship,' he said. Despite such serious implications, like children not knowing their actual medical history, some of the men, and even their lawyers, do not entirely fault the mothers, who say the wrong man is the father of their child for a variety of reasons. Some of the women, they said, are in denial that there could be more than one possible father. Others do not want to be seen as adulterers. And still others believe the truth will destroy relationships both with their partner and their child. A spokesman for one mother who did not want to be interviewed explained why she had not been honest with her husband. 'The boy would have found out,' he said. 'She wanted to protect the boy.' But some women are more deliberate in what Mr. Leving called 'father shopping,' picking the best provider possible even when he is not the true father. Lawyers like Mr. Leving advise to take the test without the mother's knowledge, 'that way if he's the father, he doesn't have to start conflict with the mother.' Mr. Dixon said that he was floored when he got the DNA test results, but that he was not angry at his girlfriend. 'I was just really hurt,' he said. 'That was four years you're getting attached, a long time to put your heart into somebody.' Slide58:  He said he insisted on both of them telling the girl right away. 'I told her that I still loved her, but that I didn't want her to grow up with a lie,' he said. 'She was shocked. Her first question was who's my dad and where's he? I kind of left it up to her mom to tell her.' The mother refused a request for an interview through Mr. Dixon. As it turned out, Mr. Dixon said, the biological father is not in the picture, and 'I was lucky enough that the relationship between me and the mother remained civilized.' Mr. Dixon, who also has a son from an earlier relationship, and the girl have gone back to their old routine. He regularly picks her up after school and delivers her back to her mother before heading to work at the hotel, he said. Little has changed, except that he now calls her 'goddaughter' and she calls him 'goddaddy.' Most of the time, anyway. 'Sometimes,' he said, 'she still calls me dad.' Question 1, 7PM Class:  Question 1, 7PM Class Read the article at the end of the exam about DNA paternity tests. Use the graph on the next page for your answer. Draw a budget line and indifference curves between leisure and income for Joseph Dixon before his girlfriend told him that he was the father of his child. Show the effect of making a court ordered monthly child support payment. Will this make him work more or less? Depict and explain all changes on your graph in the box below. Compare the effects of Joseph Dixon continuing to accept or rejecting the child after finding out he is not the father. Will this make him work more or less? Depict on your graph and explain or discuss all changes on your graph in the box below. Suppose the law is changed so that a father can stop paying child support if a DNA test proves that he is not the biological father. Depict on your graph and explain or discuss all changes on your graph in the box below. Slide60:  Draw a budget line and indifference curves between leisure and income for Joseph Dixon before his girlfriend told him that he was the father of his child. Show the effect of making a court ordered monthly child support payment. Will this make him work more or less? Depict and explain all changes on your graph in the box below. Compare the effects of Joseph Dixon continuing to accept or rejecting the child after finding out he is not the father. Will this make him work more or less? Depict on your graph and explain or discuss all changes on your graph in the box below. Suppose the law is changed so that a father can stop paying child support if a DNA test proves that he is not the biological father. Depict on your graph and explain or discuss all changes on your graph in the box below Slide61:  Leisure (hours per month) Income Start If he pays child support and continues to work the same hours. If leisure is a normal good, the alleged father will decrease consumption of leisure but still have less income despite working more after making his child support payment. Whether he accepts of rejects the child will have no affect on his work decision because he has to pay the same child support in either case. If the DNA test show he is not the father and he is relieved of his child support obligations he will return to the point he originally started at. Budget Line and Indifference Curve Quiz:  Budget Line and Indifference Curve Quiz Alex is a mortgage broker at Countrywide who gets paid solely on a commission basis. For every $100,000 of mortgages he originates he gets a .25% (one quarter of one percent) commission, i.e. $250. If he works a 10 hour day he can usually originate $500,000 worth of mortgages--$1250 in commissions. Countrywide requires it’s brokers to work a minimum of 40 hours a week but gives them the option of working more hours and, of course, sometimes brokers work fewer hours by calling in sick, taking personal days, etc. Draw Alex’s MONTHLY budget line between hours of LEISURE and income assuming there are 30 days in the month and 24 potential working hours per day. Label the intercepts on both axes. Draw Alex’s indifference curves assuming he earns $20,000 per month. Label the appropriate values on both axes. This month, Countrywide changes the commission schedule for it’s brokers. For the first 6 million dollars of loans each broker originates each month he gets nothing and then gets 1% for any loans above $6 million. Depict Alex’s new budget line. What will happen to Alex’s income? Will it go up or down? Explain and depict. How many hours will it take to generate $6 million in loans? How many hours will it take to replicate his previous income? Slide63:  Leisure (hours per month) Income A 720 (40 hrs*4 weeks*$50,000 per hour)*.0025=$20,000 20K 560 720-(40*4)=560 10K Alex Originates 8 million in 160 hrs.: For the first 6 mil. he gets $0 For the next 2 million he gets (2 mil. *1%)=20,000 600 IF Alex works 24 hours a day for 30 days, he will consume 0 hours of leisure and will originate $22,400,000 of mortgages (720*50,000)-*.0025=90,000 If Alex doesn’t work at all, he will consume 24 hrs. of leisure for 30 days a month. 30*24=720 90K Alex makes more money and consumes less leisure. If Alex works 120 hours he will generate 6 mil. In loans and get no commission. Slide64:  Leisure (hours per month) Income A 720 20K 560 10K 600 90K Both events cause Alex to get more enjoyment out of non-work activities making leisure more valuable and income less valuable. Therefore the slope of the IC at B will increase, i.e. the IC will become steeper. B will no longer be an equilibirum and Alex will move to C where he is consuming more leisure and working less. Consider two events that occur in Alex’s life. Which of these events will assist Countrywide management in meeting it’s goal of increased work effort from existing employees? Explain and depict on your graph. A. He meets Lily and gets married. After getting married, he now finds that when he is at work, he really missed being with his wife and can’t wait to get off work and go home so he can hang out with her. B. He goes to the doctor and finds out he has become infected with Hepatitis C and, even with proper medical care, can expect a reduced lifespan. What effect will the changes in Alex’s life have on the slope and shape of his indifference curves? Explain.

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