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Q5. Assume an individual has a utilitv function of this form U(C_.L)=16 + 3(CxL) This utility function implies that the individual's marginal utility of leisure
Q5. Assume an individual has a utilitv function of this form U(C_.L)=16 + 3(CxL) This utility function implies that the individual's marginal utility of leisure is 8C and her marginal utility of consumption is SL. The individual has an endowment of V=$320 in non labour income and T = 15 hours to either work (h) or use for leisure (L). Assume that the price of each unit of consumption good p=Sl and the wage rate for each hour of work w=$24. (a) Find the reservation wage of this individual. (4 points) (lo) Calculate the minimum dollar amount required to convince this individual to give up an additional leisure hour in return for additional consumption good when she is already working 5 hours. Determine the change in consumption when the person now works 6 hours instead of 5 hours. (6 points) (c) What is this individuals optimal amount of consumption and leisure'? (12 points) (d) Suppose that there is a shock to this labour market and the competitive market wage rate jumps to 333. Determine whether the substitution or income effect dominates for this individual. (8 points)
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