need help in economics

Assignment 1 Due October 26th, 2015, in class Must be submitted as a hard copy

Question 1

Consider a person, “Dangerous Dave”, who is 20 years old and is considering two career paths.

The first option is becoming a professional free-style skier. This profession requires no additional education or training and can earn Dave approximately $25,000/year for the first 2 years, $100,000 for the next 18 years (as he gains additional skill and secures sponsorship money), and $30,000 year for the remaining 10 years of his career (as his skills deteriorate).

The second option is for Dave to become Red Bull event organizer. However, this position requires a diploma in event management. Dave would enroll in local college which provides a 2 year program that costs $10,000/year (tuition and books). Upon completion of the schooling, Dave figures he could make approximately $60,000/year during the following 3 years. This period of time would allow Dave to establish himself as a competent business person that can take on new and more challenging events. After the 3 years, Dave estimates that he will then be able to make $125,000/year for 10 years. After these 10 years are up Dave believes the stress of event organization will have taken its toll and he will reduce his contract load such that he earns $60,000/year for the remaining 15 years of his career.

QUESTION: Assuming Dangerous Dave starts either working or schooling now, and a 5% discount rate, which path should he take? Explain using both math and graphs where necessary. For simplicity, assume tuition and book fees along with salaries occur at the end of the year.

Formula for an annuity (end of year payment):

PV = PMT

i (1 −

1

(1 + i)n )

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Formula for present value:

PV = FV

(1 + i)n

* Use of a spreadsheet package will make your life much simpler for this question. Also make sure everything is time discounted to the current time period thus, after annuity formulas are calculated, the present value formula will be needed.

Question 2

Now consider “Insane Jane”, twin sister of Dangerous Dave. Jane is considering becoming a pickpocket. Being a pickpocket requires no education, but Jane hopes to learn by training with her friend Johnny “Quick-Hands” who will be responsible for divvying out the daily “earnings”. Johnny figures that it will take Jane two years to learn the trade. During the training, Johnny figures that Jane can only pocket $25 worth of goods per day. After the training however, Johnny estimates that Jane will be able to steal $150 worth of goods per day. Should Jane decide NOT to take Johnny’s helpful training program, she will most likely be able to steal $60 of goods per day.

QUESTIONS: What type of training is this? How much should Johnny compensate Jane during the training, and consequently should Johnny allow Jane to reap all her earnings once she completes the training? Explain and use graphs where appropriate. Lastly, Johnny warns Jane that should she wish to work on her own after the training, she had best leave town. Jane believes this warning and knows that she must uproot her life should she wish to quit working for Johnny in the future. Given this costly endeavour, how does this issue affect your answers to the question above (you do not have to calculate this, just provide an intuitive response)?

Question 3

Lastly, consider a much more ”ordinary” individual deciding how many hours to work. The individual has 60 hours per week available that he/she can spend either working or engaging in leisure. The going wage rate for this individual is $25 per hour. Moreover, no matter how much they work, this person receives $200 per week in rental income. Therefore, this

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individual’s total income is wage earnings (dependent on how many hours they work) plus rental income.

QUESTIONS: Draw this person’s consumption-leisure budget constraint with leisure (l) on the X-axis and income (y) on the Y-axis. Show an equilibrium where this person chooses to work 40 hours per week using an indifference curve. Now consider a situation where due to unpaid taxes, the government decides to garnish 50% of this person’s pay cheque. As a result, their wage is now $12.50 per hour. Using the diagram you derived from above, show an outcome where the individual now works more hours than previously. Using income and substitution effects, explain this result.

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