Question

In: Economics

Bob is deciding how much labour he should supply. He gets utility from consumption of beer...

Bob is deciding how much labour he should supply. He gets utility from consumption of beer (given by C) and from leisure time (given by L), which he spends hanging out with his friend Doug. This utility is given by the following utility function:
U(C, L) = ln(C) + θ ln(L)
where the value of θ was determined by your student number and ln(C) denotes the natural logarithm of consumption etc. Given this utility function, Bob’s marginal utility from consumption is given by:
MUC = ∂U = 1 ∂C C
and his marginal utility from leisure is given by: MUL = ∂U = θ
∂L L
Bob has 12 hours each day to allocate between working and leisure time. For every hour that he works he earns a wage of W . The dollar value of this wage was determined by your student number. He spends all of his income on beer which costs $5 per unit.
(a) If Bob devotes L hours of his time to leisure, how many hours does he work? Write out Bob’s budget constraint.
(b) Suppose Bob is currently spending exactly five hours on leisure, that is L = 5.
i. Use Bob’s budget constraint to figure out how much beer he can consume.
ii. Calculate the slope of Bob’s indifference curve at this point. Is the slope of his indifference curve at this point greater than, or less than the slope of his budget constraint?
iii. At this point could Bob raise his utility by increasing or decreasing the number of hours he works? Carefully explain your answer.
(c) Solve for Bob’s optimal choice of hours worked, hours spent on leisure and beer consumption.

Solutions

Expert Solution


Related Solutions

If we consider pretzels and beer to be complementary goods, then a decrease in the supply of beer (in the sense of a shift of the supply curve for beer to the left) should:
  If we consider pretzels and beer to be complementary goods, then a decrease in the supply of beer (in the sense of a shift of the supply curve for beer to the left) should: a. increase in the demand for pretzels. b. decrease the price of beer. c. increase the price of pretzels. d. decrease the demand for pretzels. e. none of the above.
1.     Elmer is updating his summer wardrobe.  The amount of utility he gets from shirts and shorts is...
1.     Elmer is updating his summer wardrobe.  The amount of utility he gets from shirts and shorts is listed in the table below, where each number represents how much utility (in utils) he receives from the combination of shirts and shorts. 1 shirt 2 shirts 3 shirts 4 shirts 1 pair of shorts 15 27 37 46 2 pairs of shorts 26 37 45 51 3 pairs of shorts 35 45 51 55         a.     What is the marginal utility from buying another pair...
When a firm is deciding how much cash to distribute to stockholders, it should consider two...
When a firm is deciding how much cash to distribute to stockholders, it should consider two things: (1) The overriding objective is to maximize shareholder value and (2) the firm's cash flows belong to shareholders, so income shouldn't be retained unless management can reinvest those earnings at higher rates of return than shareholders can earn themselves. The model sets the distribution paid equal to net income minus the amount of retained earnings necessary to finance the firm's optimal capital budget....
When a firm is deciding how much cash to distribute to stockholders, it should consider two...
When a firm is deciding how much cash to distribute to stockholders, it should consider two things: (1) The overriding objective is to maximize shareholder value and (2) the firm's cash flows belong to shareholders, so income shouldn't be retained unless management can reinvest those earnings at higher rates of return than shareholders can earn themselves. The-Select-capital budgetingcapital structureresidual distributionItem 1 model sets the distribution paid equal to net income minus the amount of retained earnings necessary to finance the...
When a firm is deciding how much cash to distribute to stockholders, it should consider two...
When a firm is deciding how much cash to distribute to stockholders, it should consider two things: (1) The overriding objective is to maximize shareholder value and (2) the firm's cash flows belong to shareholders, so income shouldn't be retained unless management can reinvest those earnings at higher rates of return than shareholders can earn themselves. The model sets the distribution paid equal to net income minus the amount of retained earnings necessary to finance the firm's optimal capital budget....
QUESTION 20 Mandy gets utility from consuming nutella and doritos. Her utility function is of the...
QUESTION 20 Mandy gets utility from consuming nutella and doritos. Her utility function is of the following form: U = 50 Doritos + 87 Nutella The price of nutella is $63 per jar, the price of doritos is $16 per bag and her income is $3,931 What is the MRS(doritos, nutella)? QUESTION 21 The utility function and the prices are the following: U =min{ 80 x1 , 12 x2} P1=50,   P2=52 and I =5,157 What is the optimal amount of...
Decomposition of the effect of a wage decrease on labour supply Bob’s preferences over consumption (c)...
Decomposition of the effect of a wage decrease on labour supply Bob’s preferences over consumption (c) and leisure (r) are represented by the following utility function: u(c, r) = c^(0.6)r^(0.4). Suppose that Bob is endowed with $100 and 50 hours (per week) to allocate between leisure and work. Denote the price of the consumption good by p and the wage by w. Express mathematically all the constraints faced by Bob. Draw Bob’s feasible set. Derive Bob’s (gross Marshallian) demands for...
What direct labour cost should have been incurred to make the 16,000 speakers? By how much does this differ from the cost that was incurred?
Affordable Electronics Inc. manufactures medium-quality, reasonably priced wireless speakers for home use. The company uses standards to control its costs. The labour standards that have been set for one speaker are as follows Standard Hours Standard Rate per Hour Standard Cost 12 minutes (0.2 hours) $15.00 $3.00 During July, 3,400 hours of direct labour time were recorded to make 16,000 units. The direct labour cost totalled $49,300 for the month.   Required: 1. What direct labour cost should have been...
Suppose marginal utility from leisure is given by 3c0.5/(2ℓ0.5) and marginal utility from consumption is given...
Suppose marginal utility from leisure is given by 3c0.5/(2ℓ0.5) and marginal utility from consumption is given by 3ℓ0.5/(2c0.5) and that an individual can work up to 24 hours per day at a wage of $20 per hour. A. Write the mathematical condition which must be satisfied in order for a worker to participate in the labour force. Write the two mathematical conditions which a participant's optimal choice must satisfy (write them in terms of c and ℓ rather than Y...
Explain how the concept of marginal utility can be used to find the utility maximizing consumption...
Explain how the concept of marginal utility can be used to find the utility maximizing consumption bundle. Explain using the most intuitive terms you can.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT