Reference no: EM132649353
Teenagers under age 18 in New York State are prohibited from working more than 8 hours a day, except if they work as babysitters. Consider a 17-year-old who has two options for paid work. She can work for $6 per hour with a catering service (limited to 8 hours per day) or work for $5 per hour as a babysitter (with no limitations on hours worked). Her utility function is given by U(C, L) = CL, where C is all her expenditure on consumption good and L is the total amount of leisure she consumes. Assume that hours not spent working counts as leisure.
-Draw the daily (T = 24hours) budget constraints for each of her paid-work options (assume she can work either for the catering service or as a babysitter but cannot do both). Write the equations for the budget constraint.
-What is the optimal labor supply and consumption for this teenager?
- Now consider that the teenager also receives a pocket allowance of $10 everyday. How does this change her labor supply decision? What is the income and substitution effect for consumption good? What is the income and substitution effect for leisure?
-However, because of COVID-19 outbreak on Earth, she decides to go and settle on a different planet with other inhabitants already living there. She still faces the same choice. The only things that change is that on this new planet, there are only 14 hours in a day (instead of 24, as on Earth) and she no longer receives her daily pocket allowance. If she chooses to work for catering service, she can work a maximum of only 8 hours a day at the wage rate of $6 per hour. If she chooses to work as babysitter, she can work as many hours as wishes 1 at a wage rate of $5 per hour. What is her optimal consumption and leisure choice on this new planet?
-In retrospect, was it a good decision (relative to part (3)) to move to a different planet if the utility gain from living without fear of COVID is 100?
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