MODELLING LABOR SUPPLY USING LEISURE AS A GOOD

An employee gets utility from consumption(c), leisure time (l),free time spent outside of the workday), and the break time(b)that she has during the workday, as described bythe following utility function:

U(c,l,b)=cl+b

By law, she is required to take a 30-minute break during the workday, regardless of the amount of time she works.She is able to set the number of hours she works, and can work fractions of an hour.Currently, her employer requires that she start working at 9am, paysher$10 per hourfor hours worked, andpays her for her break time.Shegoes to bed at 1am every night and is unable to sleep before that.

Her employer has decided to institute a new policy: while she will still be required to take a 30-minute break, she will not be paid for the break. In addition, the firm will also require her to start her workday at 8:30am.

1. Using the available information, evaluatehow the change in policy will affect her allocation of time and her consumption. Will she be happier under the new policyor the old policy?Provide some intuition for your answer.
2. How do you think your answer might change if she also experienced utility from the number of hours of sleep? No need to solve this out, just provide some intuition about how the setup would change andbrieflyexplain your prediction of what would happen.