Suppose that you have the following utility function:
U (L,Y ) = LY + 2Y , where L is hours of leisure and Y is other goods. The price
of Y is 1. For now suppose that wages are your only source of income. You
allocate 18 hours a day between work and leisure (and sleep during the remaining 6 hours).
- Assume that your hourly wage is 1. Write down your budget constraint.
- How many hours of labour would you supply when your hourly wage is 1? You can use any method you want.
- Now suppose that your hourly wage increases to 2. How many hours of labour would you supply now?
- Finally, imagine that you have received an inheritance which always pays you 8 dollars per day. The hourly wage is still 2. How many hours of labour will you supply?
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