EXERCISE 2 A consumer may consume food a: and hours of leisure time h. The price of one unit of food is $1. Initially, the consumer has no money and 24 hours of spare time that she may devote either to work, or to leisure. The consumer earns wage rate 3 per hour for the ï¬rst ï¬ve hours of work, and 3â€™ per hour for additional overtime hours. She also faces a tax rate of t percent on labor income earned above amount M. Draw the consumerâ€™s budget set for the following two cases of parameter values: 1.8 = $6, 8â€™ = $8, 75 = 30%, M = $70; 2. s = $5, 8â€™ = $7, 75 = 40%, M = $20. Which bundle(s) correspond to kink(s) of the consumer budget constraint? EXERCISE 3 You have an income of $100 to spend on two commodities. The price of Commodity 1 is constant at $5 per unit. The price of Commodity 2 is $2 per unit if you buy less than 20 units. However, there is a penalty: the price of any additional unit of Commodity 2 in excess of 20 units raises to $3 per unit. Draw your budget set. At which bundle(s) you budget constraint has kink(s)?
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