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Consider an individual whose utility function is given by U(C, L) = ln C +ln L, where C is expenditure on consumption and L is
Consider an individual whose utility function is given by U(C, L) = ln C +ln L, where C is expenditure on consumption and L is hours of leisure. Assume that this individual has a total of T hours in a day which she can allocate to either work or leisure. She receives an hourly wage rate of w, and has a non-labor income V . This worker maximizes her utility subject to her budget constraint. Assume that > 0, > 0
- Solve the maximization problem stated in part (b) to obtain optimal leisure choice of this worker.
- Calculate the reservation wage for this individual
- Derive the labor supply curve for this worker. Provide the exact and complete equation. (f)
- Now, consider that the government taxes labor earnings of this individual at a tax rate of 20 percent. What is the new labor supply function? Does the reservation wage change? Why/Why not?
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