2. Cindy gains utility from consumption C and leisure L. The most leisure she can consume in any given week is 80 hours. Her utility function is: U(C, L) = C(1/3) × [(2/3) In addition, Cindy receives $400 each week from her grandmother. a) Derive Cindy's marginal rate of substitution (MRS). b) Calculate Cindy's reservation wage. c) Suppose Cindy's wage rate is $40 per hour. Write down Cindy's budget line. Will Cindy work? If Cindy works, how many hours does she work? d) Suppose Cindy's wage increases to $50. Write down Cindy's new budget line and calculate how many hours that she works. e) Calculate the labour supply elasticity for Cindy when wage increases from $40 to $50. Is Cindy's labour supply elastic or inelastic? f) Draw a figure to illustrate the income and substation effects when the wage increases from $40 to $50. g) Calculate the income effect in (f). (Note that C(1/3) =³√/C and L2/³) = (√ī)².) h) Calculate the substitution effect in (f).
2. Cindy gains utility from consumption C and leisure L. The most leisure she can consume in any given week is 80 hours. Her utility function is: U(C, L) = C(1/3) × [(2/3) In addition, Cindy receives $400 each week from her grandmother. a) Derive Cindy's marginal rate of substitution (MRS). b) Calculate Cindy's reservation wage. c) Suppose Cindy's wage rate is $40 per hour. Write down Cindy's budget line. Will Cindy work? If Cindy works, how many hours does she work? d) Suppose Cindy's wage increases to $50. Write down Cindy's new budget line and calculate how many hours that she works. e) Calculate the labour supply elasticity for Cindy when wage increases from $40 to $50. Is Cindy's labour supply elastic or inelastic? f) Draw a figure to illustrate the income and substation effects when the wage increases from $40 to $50. g) Calculate the income effect in (f). (Note that C(1/3) =³√/C and L2/³) = (√ī)².) h) Calculate the substitution effect in (f).
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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just subparts g and h
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