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In: Economics

Suppose an individual has 40 hours to work. Suppose also the individ- ual has a net...

Suppose an individual has 40 hours to work. Suppose also the individ- ual has a net wealth outside the labor market of 100$. Suppose the wage rate is equal to 20 $ per hour. Graph the budget constraint. Suppose the marginal rate of substitution between consumption (C) and leisure (l) is equal to c/(l+10). What will a utility maximizing consumer choice between labor and consumption be? Suppose the wage falls to $5 per hour. What is the new choice of labor vs. consumption. Interpret this graphically (qualitatively and not quantitatively) in terms of substitution and income effects. Repeat this exercise with both 12 and 1000 hours respectively. [I want you to practice with and without the working hours limit (l ≤ h) binding. Feel free to raise or lower the wage rate in your practice to make this happen.

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Rahul Sunny answered 2 years ago
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