Ranking of Contracts Based on Bill's Preferences: Income vs. Leisure Time, Exams of Economics

Download Ranking of Contracts Based on Bill's Preferences: Income vs. Leisure Time and more Exams Economics in PDF only on Docsity! Fall 2008 EXAM I – ALL VERSIONS ESSAY/PROBLEM (25 points) Bill must choose between three different contracts offered by his employer: I. Work 8 hours a day for $100 per day. II. Work a minimum of 4 hours for $80 plus $5/hour for each additional hour he works above 4 hours. For example, if he works 6 hours a day he receives $80 + 2($5) = $90 per day. III. There are no minimum hours of work required. He receives $10/hour for each hour he works. His preferences are (partially) depicted in the graph on page 6 of this exam. How will Bill rank these contracts from most preferred to least preferred? Include appropriate (labeled) additions to the graph to support your discussion. If we use “>” to mean “is preferred to,” Bill’s ranking will be: II > III > I Consider the opportunities these contracts present Bill regarding income and leisure time. Contract I (the blue dot in the graph) enables Bill to reach a level of satisfaction equal to UI. Contract II (the red line) enables Bill to reach a higher level of satisfaction UII by working 10 hours a day for $110 (= $80 + 6  $5). He will prefer contract II to contract I. Contract III (the gray line) offers the Bill the opportunity to increase his satisfaction above UI, but he will not be able to reach UII.