Economics 201 Fall 2014 Final Exam Name:________________________

2. (15 points) Consider my former students Ethel and Cletus who value the flexibility of being able to
determine how many hours a month they work (and therefore did not want a salaried job). They were
both offered two consulting jobs when they graduated. Job A came with an hourly consulting wage wA,
and job B came with an hourly consulting wage of wB with wA significantly higher than wB. In both
jobs, they were required to see 10 new potential clients each month to learn about new consulting
opportunities for the firm, but in Job A these potential clients lived all over the world while in Job B they
lived locally. Thus Job A involved a lot of required travel to see clients, whereas Job B did not. In both
jobs, you could decide which consulting projects to take on and how many hours to spend on them, but
you could only begin charging an hourly wage rate once you took on a consulting project.

While financial travel costs in Job A were fully covered by the company, the time involve in traveling
was not considered part of billable work time and therefore was not compensated with wA. As a result,
accepting Job A meant having less leisure even if you chose not to take on any consulting hours for the
month. Assume throughout that both Ethel and Cletus have tastes that are homothetic in leisure and
consumption. (Assume no utility is gained from the actual traveling.)

a. Begin with a graph that has Monthly Hours of Leisure on the horizontal axis and Monthly
Dollars of Consumption on the vertical. Ethel told me she was indifferent between the two jobs.
Illustrate in your graph her budget under Job A and her budget under Job B and include in your
graph an indifference curve for Ethel that is consistent with her being indifferent between the
two jobs. (1.5 points)
b. Ethel ended up accepting Job A. Can you tell if she makes more money in this job than she
would have had she accepted Job B? Explain briefly using your graph from part (a). (1 point)
c. Can you tell whether Ethel spends more time doing billable consulting work in Job A than she
would have done in Job B? (Hint: This is a little tricky remember that the required travel time
in Job A is not billable!) If so, explain. If not, what key feature of her tastes would you have to
know more about in order to be able to tell? (3 points)
d. Cletus also told me that he was indifferent between the two job offers. Suppose he had also
accepted Job A. Given they both have homothetic tastes, does this imply Cletus would end up
making the same amount of money as Ethel? (1.5 points)
e. In fact, however, Cletus accepted Job B. A year later, Ethel succeeds in persuading her company
to stop requiring consultants to travel and to instead employ video-conferencing technology for
consultants to communicate with their 10 new potential clients per month. Neither Job A nor Job
B now has a travel requirement, but consulting wages continue to be wA and wB as before. As a
result, Cletus switches jobs and joins Ethel in Job A. Can you tell whether Cletus will now make
more or less money (for consumption) than he previously did at Job B? If so, illustrate this. If
not, explain why not. (2 points)
f. Continuing part (e), can you tell whether Cletus will now work more or less than he previously
did in Job B? If so, illustrate this. If not, explain why not. (2 points)
g. Suppose there are lots of companies that offer jobs of type A and lots that offer jobs of type B,
and suppose all type A companies switch away from travel and toward video conferencing. If wA
and wB were competitive equilibrium wages in the Type A labor market and the Type B labor
market to start with, how would you expect these to change as a result of the switch to
videoconferencing in the type A labor market? Illustrate using supply and demand graphs for the
two labor markets. (2 points)
h. True or False: Once labor markets adjust, all consulting workers in both labor markets are made
better off by the introduction of videoconferencing in the Type A labor market. (2 points)

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