Explain how many hours of leisure does she consume

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Reference no: EM1347919

To answer this question, consider the choice about hours of week PER WEEK. You can assume total possible hours in the week is 7 days times 16 hours per day, for a total of 112 hours.

a. Draw a budget constraint for a worker who has no unearned income, earns $10 per hour. Identify the slope and intercept of the budget line.

b. Now suppose the worker has $60 per week in nonlabor income. The income is constant and does not depend on how many hours she worked.

c. Building on (b), suppose that the worker can earn overtime for each hour above 40 hours worked per week. Her base pay remains at $10/hour, but she earns one and one-half time for each hour beyond 40 hours. Draw the new budget constraint.

d. Going back to (b), and with no overtime, suppose that the $60 per week is guaranteed payment only if total earnings are $200 or less per week. When earnings go over $200, the $60 is lost. Draw the new budget constraint.

2. Labor Supply

a. Ann's utility can be represented by the function:
U (C,L) = ln (C-10) + 3/5 ln(L). She has 16 hours/day to divide into work (H) and leisure (L). She has no unearned income. Derive the formula for her Marginal Rate of Substitution at any values of (C,L).

b. She has a wage of $10/hr and no unearned income. How many hours does she choose to work? Explain how many hours of leisure does she consume? How many dollars of consumption does she consume? Show your work.

Reference no: EM1347919

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