Consider a representative consumer whose utility function is given by U(C.L) In(C) + 0.4xL. where C is consumption, Lis leisure, and x is a multiplication sign. The consumer receives wage rate wod=6 for every hour worked, time available is 100 hours and lump-sum taxes equal 150. There are no additional sources of income. The consumer's budget constraint is thus: C-6xL+450, where xis a multiplication sign. Your cool prof calculated the optimal bundie and labeied it with the subscript "old" to denote the bundle that corresponds to the initial (old) wage rate. The optimal consumption is Coid = 15.0 and leisure is Lod -725. Suppose the wage rate increases to wnew 12. The prof caloulated the new optimal bundle: Cew30.0 and L - 85.0. Decompose the change in the optimal bundle from (Cog. l) to (Crew. Leew) into income and substitution effects. To answer this question, type in your numerical answers in the boxes provided in parts a) and b) below. Round FINAL numbers to 1 decimal place. Insert minus signs where appropriate. Be sure you report changes in consumption and changes in leisure. In response to the wage rate increasing from wld 6 to wnew -12, a). the substitution effect implies a change in consumption of (insert numerical answer in box) and a change in leisure of (insert numerical answer in box): b). the income effect implies a change in consumption of (insert numerical answer in box) and a change in leisure of (insert numerical answer in box).
Consider a representative consumer whose utility function is given by U(C.L) In(C) + 0.4xL. where C is consumption, Lis leisure, and x is a multiplication sign. The consumer receives wage rate wod=6 for every hour worked, time available is 100 hours and lump-sum taxes equal 150. There are no additional sources of income. The consumer's budget constraint is thus: C-6xL+450, where xis a multiplication sign. Your cool prof calculated the optimal bundie and labeied it with the subscript "old" to denote the bundle that corresponds to the initial (old) wage rate. The optimal consumption is Coid = 15.0 and leisure is Lod -725. Suppose the wage rate increases to wnew 12. The prof caloulated the new optimal bundle: Cew30.0 and L - 85.0. Decompose the change in the optimal bundle from (Cog. l) to (Crew. Leew) into income and substitution effects. To answer this question, type in your numerical answers in the boxes provided in parts a) and b) below. Round FINAL numbers to 1 decimal place. Insert minus signs where appropriate. Be sure you report changes in consumption and changes in leisure. In response to the wage rate increasing from wld 6 to wnew -12, a). the substitution effect implies a change in consumption of (insert numerical answer in box) and a change in leisure of (insert numerical answer in box): b). the income effect implies a change in consumption of (insert numerical answer in box) and a change in leisure of (insert numerical answer in box).
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Consider a representative consumer whose utility function is given by U(C.L) = In(C) + 0.4xL. where C is consumption, Lis leisure, and x is a multiplication sign.
The consumer receives wage rate w=6 for every hour worked, time available is 100 hours and lump-sum taxes equal 150. There are no additional sources of
income. The consumer's budget constraint is thus: C -6xL+450, where xis a muliplication sign. Your cool prof calculated the optimal bundie and labeied it with
the subscript "old" to denote the bundle that corresponds to the initial (old) wage rate. The optimal consumption is Coid = 15.0 and leisure is Loid 725.
Suppose the wage rate increases to wnew= 12. The prof calculatod the now optimal bundle: Cnow 30.0 and L = 85.0.
Decompose the change in the optimal bundlo from (Cold. Lak) to (Crew. Lnew) into income and substitution offects. To answer this question, type in your
numerical answers in the boxes provided in parts a) and b) below. Round FINAL numbers to 1 decimal place. Insert minus signs where appropriate. Be sure you
report changes in consumption and changes in leisure.
In response to the wage rate increasing from wold 6 to wnew 12,
a). the substitution effect implies a change in consumption of (insert numerical answer in box) and a change in leisure of (insert numerical answer in
box):
b). the income effect implies a change in consumption of (insert numerical answer in box) and a change in leisure of (insert numerical answer in box).
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