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Exercise 2 [20 marks]
Consider a woman, Jane, who runs a small business providing legal services, in particular she reviews property sale contracts.
She charges her clients $10 per contract reviewed.
The table below shows some points on her production function relating how many hours she works to the number of contracts reviewed.
Hours 0 1 2 3 4 5 6 7 8 9 10 11 Contracts 0 12 23 33 42 50 57 63 68 72 75 77
a) Draw her production function showing how hours work is related to contracts reviewed (either on paper or in Excel). [1 mark] b) Explain why her marginal product for her 10th hour is different from her marginal product of her 1st hour. [3 marks] c) Assume that Jane requires a minimum of 14 hours per day for sleep and daily tasks such as looking after children, so these are not available for work or free time. It is only the remainder that she can choose to work or have free time. Draw her feasible set showing the income and free time that she could achieve each day. [3 marks] d) Would her optimal choice be 4 hours of free time and $500 income? Explain. [2 marks] e) What is the opportunity cost to Jane of increasing from 2 hours free time to 3 hours free time? [1 mark] f) Select an optimal choice of free time and income, and draw an indifference curve through that point. [2 marks] g) Draw additional indifference curves above and below the indifference curve in (f) and use them to explain why the point in (f) must be optimal for Jane. [4 marks] h) Explain how the Marginal Rate of Substitution (MRS) and the Marginal Rate of Transformation (MRT) must be related to each other at the optimal choice, and why. [4 marks]