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Sample Answer to question 16 in the Practice Mid

# Sample Answer to question 16 in the Practice Mid - c 112...

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Sample Answer to question 16 in the Practice Mid-Term Exam Mr. Cog has 18 hours per day to divide between labor and leisure. His utility function is U ( C , R ) = CR , where C is dollars per year spent on consumption and R is hours of leisure. If he has a nonlabor income of 40 dollars per day and a wage rate of 8 dollars per hour, he will choose a combination of labor and leisure that allows him to spend a. 184 dollars per day on consumption. b. 82 dollars per day on consumption.
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Unformatted text preview: c. 112 dollars per day on consumption. d. 92 dollars per day on consumption. e. 138 dollars per day on consumption. Answer: Max U(C,R) = CR (1) s.t. C+8R=40+8*18 (2) Note: this is the budget constraint. The right-hand side is the consumption, and the left-hand side is the endowment as a sum of nonlabor and labor income. from (2) C=184-8R (3) plug (3) into (1) Max (184-8R)*R FOC dU/dR = 184-16R=0 R=184/16 Plug R in (3) C=184(1-8/16) =92...
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