Joe won $365,000 a year for life in the state lottery ($1000 per day for life). Use a labor-leisure choice analysis to answer the following questions: a. Show how Joe’s lottery winnings affect the position of his budget line. [Hint: think about the two things Joe “purchases”, goods (G) and relaxation (R). Assume the price of goods is PG (you can assume this is equal to one if that makes the math easier for you) and the “price” of leisure is Joe’s foregone wage (w). It’s also easiest if you think of this in the context of his daily budget constraint.] b. Joe’s utility function for goods per day (G) and hours of leisure (relaxation) per day (R) is U = G + 240R1/2. After
Joe won $365,000 a year for life in the state lottery ($1000 per day for life). Use a labor-leisure
choice analysis to answer the following questions:
a. Show how Joe’s lottery winnings affect the position of his budget line.
[Hint: think about the two things Joe “purchases”, goods (G) and relaxation (R).
Assume the price of goods is PG (you can assume this is equal to one if that makes the
math easier for you) and the “price” of leisure is Joe’s foregone wage (w). It’s also
easiest if you think of this in the context of his daily budget constraint.]
b. Joe’s utility function for goods per day (G) and hours of leisure (relaxation) per day (R) is
U = G + 240R1/2. After winning the lottery, does Joe continue to work the same number
of hours each day? What is the income effect of Joe’s lottery gains on the amount of
goods he buys per day?
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