4. A consumer’s utility function over leisure and consumption is given by u(L, Y) =LY. Wage rate is w and the price of the composite consumption good is p = 1. (a) Suppose w = 10. Find the optimal leisure - consumption combination. (b) Suppose the overtime wage law is passed so that the firm must pay 1.5 times the normal wage for hours worked beyond the first 8 hours. Find the effect on the hours worked. Decompose the effect into substitution effect and income effect
4. A consumer’s utility function over leisure and consumption is given by u(L, Y) =LY. Wage rate is w and the price of the composite consumption good is p = 1. (a) Suppose w = 10. Find the optimal leisure - consumption combination. (b) Suppose the overtime wage law is passed so that the firm must pay 1.5 times the normal wage for hours worked beyond the first 8 hours. Find the effect on the hours worked. Decompose the effect into substitution effect and income effect
Chapter10: Cost Functions
Section: Chapter Questions
Problem 10.12P
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4. A consumer’s utility function over leisure and consumption is given by u(L, Y) =LY. Wage
rate is w and the price of the composite consumption good is p = 1.
(a) Suppose w = 10. Find the optimal leisure - consumption combination.
(b) Suppose the overtime wage law is passed so that the firm must pay 1.5 times the normal wage
for hours worked beyond the first 8 hours. Find the effect on the hours worked. Decompose the
effect into substitution effect and income effect
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