Microeconomic Analysis Assignment Solution

Running Head: MICROECONOMIC ANALYSIS
Microeconomic Analysis
Name of the Student
Name of the University
Author note

MICROECONOMIC ANALYSIS1
Table of Contents
Answer 1....................................................................................................................................2
Optimal bundle without subsidy............................................................................................2
Optimal bundle with subsidy.................................................................................................3
Answer 2....................................................................................................................................4
Answer 3....................................................................................................................................5
Income tax and labor-leisure choice......................................................................................5
Answer 4....................................................................................................................................7
References..................................................................................................................................9

MICROECONOMIC ANALYSIS2
Answer 1
Optimal bundle without subsidy
Figure 1: Consumer equilibrium without subsidy
(Source: as created by Author)
The figure above describes optimal bundle choice for Doreen’s family without
implementation of subsidy. The horizontal axis measures childcare services and the vertical
axis measure the spending on all other goods. The current income of Doreen’s family is
$60,000. It is given that the family would never spend more than 50% of its income on
childcare service. This means spending on childcare service would never exceed $30,000.
This gives kinked budget line, ABC. The kink occur at the extreme point where the family
allocate its income between childcare and other goods equally. Currently, the family spend
$10,000 on childcare service. Therefore, rest is spent on other goods. The equilibrium point
without subsidy is E obtained from the tangency between the budget line and the indifference
curve IC11. The optimal consumption bundle is at (10,000, 50,000).
1 Fine, Ben. "Microeconomics." University of Chicago Press Economics Books (2016).