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Problem 2: Budget Constraint (15 pts) Carolyn has the following budget constraint dening the amount of cookies c she can consume at price p. She
Problem 2: Budget Constraint (15 pts) Carolyn has the following budget constraint dening the amount of cookies c she can consume at price p. She works h hours per week at wage rate 1:) per hour. She has total time T which she can spend on leisure E or at work h. Her budget constraint is w(T I?) 2 pc a. Graph the budget constraint with leisure if on the xaxis and consumption on c on the y-axis. Be sure to label your axes. (3 pts) b. What is the maximum level of leisure Carolyn can take? (Note: dene this in terms of the parameters of the problem.) Label this on the appropriate part of the graph. (2 pts) c. What is the maximum amount of consumption Carolyn can take? (Note: dene this in terms of the parameters of the problem.) Label this on the appropriate part of the graph. (2 pts) (1. Suppose that the hourly wage rate, it), is 10 and the price of consumption, p, is 2. Suppose also that Carolyn has T : 18 hours in a day to allocate to labor h or leisure E. Plug these values into your answers for b. and c. above to nd numerical values for maximum leisure and consumption. (2 pts) e. Now suppose that due to ination, p increases to 4. Draw the new budget line on the same graph as the old budget line. Label all x and y-intercepts with the appropriate numerical values. (3 pts) f. What is the slope of the new budget line, after ination raises p from 2 to 4? (3 pts)
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