Question
4. (20 points) In this problem, you can assume that the optimal choice is interior. Let Francos utility function be U(C,L) = 2log(C) + 6log(L).
4. (20 points) In this problem, you can assume that the optimal choice is interior. Let Francos utility function be U(C,L) = 2log(C) + 6log(L). Let T denote time available to split between leisure and work, w denote the wage rate and V 0 denote non-labor income (as in class). (a) Derive his optimal choice as a function of w, T, and V .
(b) Calculate the first derivative of his optimal leisure choice with respect to w. Does the substitution effect dominate the income effect? Is this also true if V = 0?
(c) What is Francos reservation wage as a function of w, T, and V ? Is it increasing, decreasing or constant in V ? Why?
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