Suppose an individual experiences utility from consumption C and hours of leisure λ. Consider a period...

Suppose an individual experiences utility from consumption C and hours of leisure λ. Consider a period of one week, that is, a period of length T = 168 hours. Suppose the price P of a unit of output is $10. Suppose a person’s particular tastes and preferences can be represented by the utility function U(C, λ) = (C - 100) x (λ - 50). Suppose the individual can command a net wage of $40 per hour. During the period suppose the individual receives non-labor income of $300.

A. Graph the individual’s budget set.

B. Suppose λ = 123 and the individual is on the budget line. How much is this person working per week? What “price” is this person willing to pay for an additional hour of leisure? Demonstrate and explain.

C. Does this person work “too much” or “not enough”? Or does this person work the “optimal” number of hours? Demonstrate and explain.

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Expert Solution

Rahul Sunny answered 1 year ago

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