Utility function-non-labour income decreased

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Woody's utility function is U(C, R)= C- (12-R)^2, where C is his consumption and R is the amount of leisure he has per day. He has 16 hours a day to divide between work and leisure. He has an income of 20$ a day from non-labour sources. The price of consumption goods is 1$ per unit.

a) If Woody can work as many hours a day as he wishes for a wage rate of 10$ an hour, how many hours will he choose to work?

b) If Woody's non-labour income decreased to 5$ a day, how many hours would he choose to work? Comment on the income and substitution effects of his change in income and whether one of these effects dominates.

Reference no: EM13836378

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