Econ 600 Managerial Economics
Spring 2010
Dr. Yi
Problem set 11
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 (goofoff).
(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=202E
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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 Spring '10
 Chen
 Economics, Utility, Dr. Yi Problem, Hokmah market research

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