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I need help with understanding this question. Shelly's preference for consumption and leisure are given by U(C,L) = (C-100)(L-40). There are 110 hours in a
I need help with understanding this question.
Shelly's preference for consumption and leisure are given by U(C,L) = (C-100)(L-40). There are 110 hours in a week available to split between labor and leisure. Shelly earns $10 per hour. She also received $320 worth of assistance benefits each week regardless of how
much she works.
- Graph Shelly's budget constraint.
- What is Shelly's marginal rate of substitution when L = 100 and she is on her own budget line?
- What is Shelly's reservation wage?
- Find Shelly's optimal amount of consumption and leisure.
- The government now imposes tax on labor earnings= 0.2. How many hours will Shelly work in this case? Hint: The proportional tax on earnings means that, if the wage is w, then the after-tax wage is (1-)w. Solve Shelly's problem again with her after-tax wage.
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