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.
Chapter16: Labor Markets
Section: Chapter Questions
Problem 16.1P
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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.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fd370b79f-470d-4fe3-8c98-d517eae51569%2F0b54cb38-ee01-4380-bc85-bb987f5b23f8%2F16icps3_processed.jpeg&w=3840&q=75)
Transcribed Image Text: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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