Question
Problem 1. Suppose a person's utility function is: U = 20 C + 10L a. Find three baskets of C and L that give her
Problem 1. Suppose a person's utility function is: U = 20 C + 10L a. Find three baskets of C and L that give her the following levels of utility. Choose L in the range of 50 to 150. A) U = 5,000 B) U = 10,000 C) U = 15,000 D) U = 20,000 b. Draw the indifference curves of the person for each of the above utility levels. Use one graph. Problem 2. Shelly's preferences for consumption and leisure can be expressed as U(C, L) = (C - 100) (L - 40). This utility function implies that Shelly's marginal utility of leisure is C - 100 and her marginal utility of consumption is L - 40. a. What is Shelly's marginal rate of substitution when L = 100 and C=$420? What does this number tell us exactly (apply the definition of MRS) b. What is Shelly's marginal rate of substitution when L = 110 and C=$320? What does this number tell us exactly (apply the definition of MRS) c. What can we say based on the comparison of these two MRS numbers? (i.e. what does the What property of Indifference Curves that we discussed in the lecture video does this reflect? Problem 3. Consider your own preferences towards leisure and consumption. a. Would you say your indifference curves are relatively steep or flat? I.e. how do you value your leisure time? b. Now consider two cases: 1) On Sunday night at 10 pm, during a week when you are so busy, you feel like you have had no leisure time at all, and it is the first time you have a chance to rest 2) During a week when you have a lot of leisure time What would your MRS be? Meaning: how many dollars (worth of consumption) would you need to compensate you for giving up 1 hour of leisure time?
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