Microeconomic Theory
12th Edition
ISBN: 9781337517942
Author: NICHOLSON
Publisher: Cengage
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Question
Chapter 16, Problem 16.11P
a)
To determine
To find:
Equilibrium level of w and l
b)
To determine
To know:
Amount of subsidy, new equilibrium level and subsidy to be paid.
c)
To determine
To show:
Demand for labor and
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a) Explain by using an example why an MRS (Marginal Rate of Substitution) between two goods must equal the ratio of the price of the goods for the consumer to achieve maximum satisfaction?
Susan obtains utility by consuming carrots C and enjoying leisure L. Suppose that she has a daily non-wage income Y of £100 and is paid a fixed hourly wage rate of £10 for every hour she works in a local coffee shop. Assume that Susan is a utility maximiser and is free to choose x hours of work per day where 0 ≤ x ≤ 10. Assume also that the unit price of C is £1.
a) Suppose that L is measured on the horizontal axis and C on the vertical axis. Use these axes to draw the set of all C and L combinations that Susan can choose from. Write down Susan’s budget equation.
b) Suppose that Susan’s preferences over carrots and leisure are expressed by the following utility function: U(C,L) = min{C, 10L}. Calculate Susan’s optimal consumption bundle, both algebraically and graphically. Calculate the value of MRS at the optimal choice.
c) Suppose instead that Susan’s preferences are such that indifference curves in the L-C space are strictly convex to the origin, and that she chooses to work 5…
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