5. 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 = 10o. 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.

5. 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 = 10o. 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.

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

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Chapter1: Making Economics Decisions

Section: Chapter Questions

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Question

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5. 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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