Comparing Compensation Plans
An individual has a total of 2,000 hours to allocate between work and free time over a one-year period. They have no unearned income. They are presented with two different job offers:
- Offer A: A wage of $25 per hour.
- Offer B: A wage of $20 per hour, plus a guaranteed, unconditional sign-on bonus of $10,000.
Which offer provides the individual with a superior set of possible consumption and free time combinations? Justify your answer by comparing the maximum consumption achievable and the opportunity cost of free time for each offer.
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Comparing Compensation Plans
An individual has a total of 2,000 hours per year to allocate between work and free time and initially has no unearned income. The individual then receives a promotion that increases their hourly wage by 15%. Simultaneously, they begin receiving a fixed annual payment from a trust fund, which is not dependent on the hours they work. How do these two changes affect the opportunity cost of one hour of free time and the total consumption achievable if they choose to take zero free time?
An individual's budget constraint over a one-year period is represented by the equation
c = 40(3000 - t) + 2500, wherecis total consumption in dollars andtis the total hours of free time taken during the year. What is the opportunity cost of taking one additional hour of free time?