ECON 4531, Labor Economics

Labor Economics, Borjas, 8th edition

Problem 4 In this problem, you can assume that the optimal Choice is interior. Let Mary's utility function be U{C, L) = l log(C) + 4 log[L]. Let T denote time available to split between leisure and work, to denote the wage rate and V 3 0 denote nonlabor income (a) Derive Mary's optimal choice as a function of w, T, and V. (b) Caleulate the rst derivative of his optimal leisure choice with respect to w. Under what conditions does the substitution e'ect dominate the income eect? Can you derive a condition for the two effects canceling out? (c) What is Mary's reservation wage as a function of w, T, and V? Is it increasing, de creasing or constant in V