Question

14. A person’s utility function for leisure (L) and income (Y) is U(L, Y) = 10L^½ Y^½.

This means the person has MU_L = 5(Y/L)^½ and MU_Y = 5(L/Y)^½

The person has non-labor income of $1000 a month and can earn $100 per day by working. Assume a month has 30 days and a person can choose each day whether to work or have leisure.

a) If the person is working 12 days in the month, is the person maximizing his/her utility? Explain your answer.

b) What is the person’s optimal days of work and income? (6 points)

Optimal days of work : _________

Income: __________

Still U(L, Y) = 10L^½ Y^½ , MU_L = 5(Y/L)^½ and MU_Y = 5(L/Y)^½

non-labor income of $1000 a month and can earn $100 before taxes per day by working, a month has 30 days and a person can choose each day whether to work or have leisure

In response to a sudden, sharp economic downturn, the government sends each adult a payment of $1200 (as long as their income was less than $8400 a month).

c) Indicate the direction of the expected substitution and income effect of the government stimulus payment on days worked for this person: (5 points)

Substitution effect:     Increase           Decrease         Stay the same              Ambiguous

Income effect:             Increase           Decrease         Stay the same              Ambiguous

d) Calculate what actually will happen. Round your answer to the nearest tenth if necessary. (5 points)

Optimal days of work :_________

Answer 1

MARGINAL UTILITY: Marginal Utility is the extra added amount of difference in total utility by carrying compared quantity as well or vice versa.

i hope these answers cleared the questions.