Does the income or the substitution effect dominate for ed

Reference no: EM132131628

Question: Consumer's Problem Ed is a programmer, who has preferences over the consumption good and leisure given by U(C, l) = Cl. He needs to use at least 8 hours a day for sleep, eating, etc., but he can in principle work the remaining 16 hours a day. That is, h = 16. Ed has a daily non-wage income of $80.

(a) Suppose Ed's wage is $20 per hour. How much does Ed choose to work? How much does he spend on consumption?

(b) Suppose Ed's wage has increased to $40 per hour. How much does he work now? How much does he spend on consumption? Does the income or the substitution effect dominate for Ed?

(c) Suppose Ed's wage is still $20 per hour, but his daily non-wage income doubled. How much does he work and spends on consumption now?

If Ed could choose between the increase in the non-wage income described in part (c) (while keeping his wage at its old level) and the increase in wage described in part (b) (while keeping the non-wage income at its old level), which one would he prefer to have? Explain your answer.

Reference no: EM132131628

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