# 2 - ECON 4616 In-Class Exercises NAME Prof Francisca Antman...

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ECON 4616 In-Class Exercises NAME: Prof. Francisca Antman Exercise 2 Marginal Rate of Substitution and the Reservation Wage Jessica’s preferences for consumption and leisure can be expressed as U(C,L)=(C-100)x(L-40) There are 110 hours in the week to split between work and leisure. Jessica earns \$10 per hour after taxes. She also receives \$300 worth of welfare benefits regardless of how much she works. (a) Write equation for Jessica’s budget line.
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Unformatted text preview: Graph Jessica’s budget line (b) Explain in words what Jessica’s marginal rate of substitution represents. What is her MRS when L=50 and she is on her budget line (i.e. she exhausts her budget). (c) What is Jessica’s reservation wage? Explain in words what this reservation wage represents. (d) Find Jessica’s optimal amount of leisure and consumption. Give two intuitive explanations for why this is her optimal allocation....
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