Katie’s preferences for consumption and leisure can be expressed as U(C, L) = (C – 80) x (L – 40) This utility function implies that Katie’s marginal utility of leisure is C – 80 and her marginal utility of consumption is L – 40. There are 110 hours in the week available to split between work and leisure. Katie earns $15 per hour after taxes. She also receives $200 worth of assistance benefits each week regardless of how much she works. Graph Katie’s budget line. What is Katie’s marginal rate of substitution when L = 70 and she is on her budget line? What is Katie’s reservation wage?

ENGR.ECONOMIC ANALYSIS
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Katie’s preferences for consumption and leisure can be expressed as

U(C, L) = (C – 80) x (L – 40)

This utility function implies that Katie’s marginal utility of leisure is C – 80 and her marginal utility of consumption is L – 40. There are 110 hours in the week available to split between work and leisure. Katie earns $15 per hour after taxes. She also receives $200 worth of assistance benefits each week regardless of how much she works.

  1. Graph Katie’s budget line.
  2. What is Katie’s marginal rate of substitution when L = 70 and she is on her budget line?
  3. What is Katie’s reservation wage?
  4. Find Katie’s optimal amount of consumption and leisure.
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