Problem 1: Labor-Leisure Choice. Kim has utility over consumption c and leisure represented by U (c, I) = c1/4'3/4 Kim is endowed with 2000 hours to engage in either labor or leisure. Her hourly wage is w = $15. Recall: This Cobb-Douglas utility function specification implies that Kim will spend 1 4 of her endowment on c and the remaining 3 4 of her endowment on `. a) Draw Kim's budget constraint. b) Find Kim's optimal level of consumption (c), leisure (), and hours worked (h). c) Suppose that Kim's hourly wage increases to w = $18. Draw her new budget con- straint. d) Find Kim's new optimal levels of consumption, leisure, and hours worked.
Problem 1: Labor-Leisure Choice. Kim has utility over consumption c and leisure represented by U (c, I) = c1/4'3/4 Kim is endowed with 2000 hours to engage in either labor or leisure. Her hourly wage is w = $15. Recall: This Cobb-Douglas utility function specification implies that Kim will spend 1 4 of her endowment on c and the remaining 3 4 of her endowment on `. a) Draw Kim's budget constraint. b) Find Kim's optimal level of consumption (c), leisure (), and hours worked (h). c) Suppose that Kim's hourly wage increases to w = $18. Draw her new budget con- straint. d) Find Kim's new optimal levels of consumption, leisure, and hours worked.
Chapter1: Making Economics Decisions
Section: Chapter Questions
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Transcribed Image Text:Problem 1: Labor-Leisure Choice. Kim has utility
over consumption c and leisure
represented by
U (c, l) = c1/4`3/4
Kim is endowed with 2000 hours to engage in
either labor or leisure. Her hourly wage is
$15.
Recall: This Cobb-Douglas utility function
specification implies that Kim will spend 1
4 of
her endowment on c and the remaining 3
4 of her endowment on `.
a) Draw Kim's budget constraint.
b) Find Kim's optimal level of consumption (c),
leisure (), and hours worked (h).
c) Suppose that Kim's hourly wage increases to
w = $18. Draw her new budget con-
%3D
W =
straint.
d) Find Kim's new optimal levels of consumption,
leisure, and hours worked.
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