PS1-1 2009

PS1-1 2009 - Econ 600 Managerial Economics Spring 2010 Dr....

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Econ 600 Managerial Economics Spring 2010 Dr. Yi Problem set 1-1 Rick Vollman 1. Researchers at Hokmah market research and consulting company has the following utility function which represents researchers’ utility at work. U=E^(1/2)*L^(1/2) where E represents efforts and L represents Leisure (goof-off). (This specification of utility function will produce nice set of indifference curves that we saw in class). Researchers’ constraint (i.e. budget line) is L=20-2E where it is assumed that the unit value of effort is $2 and the unit value of leisure is $1. Given the set up above, the optimal combination of E and L is 5 and 10, respectively. (a) What is the total utility at this optimal level of E and L?By substituting the optimal values into the formula U = 5^1/2 * 10^1/2 = 7.071 (b) As the CEO of this company, you think that the level of E is too low. Therefore, you want to encourage the researches to increase the effort level without affecting the current utility level. How can you achieve this goal?
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PS1-1 2009 - Econ 600 Managerial Economics Spring 2010 Dr....

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