Calculate the total income and substitution effects

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Reference no: EM13853401

Xiao-Ping has 24 hours a day to divide between work and leisure, and her boss allows her to work as many hours as she wants. She has $8 per day of non-labor income, and she works at a job that pays $8 per hour. Her preferences over leisure time R ? and dollars spent on consumption C are represented by the utility functionU(C,R) = CR. What is her optimal level of daily expenditure on consumption, her optimal leisure time, and the amount of time she devotes to work? Sketch her budget line in blue ink in leisure-consumption space with leisure on the horizontal axis and consumption expenditure on the vertical axis. Next suppose that Xiao-Ping's non-labor income increases to$16 per day. Sketch her new budget line in red ink, and calculate her new optimal levels of consumption and leisure. How much does she work now? Calculate the total income and substitution effects on leisure and consumption due to the change in her income. (You do not need to decompose the total income effect into ordinary and endowment income effects.) Please complete all parts to the question and show all work.

Reference no: EM13853401

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