11. A worker derives utility from consumption, C and leisure, L U = U(C, L) and initially faces the constraints p.C = N+w.H H = 24 - L where p is the nominal price of consumption, N> 0 is unearned income, w is the nominal wage and H is hours worked. (a) Derive the budget constraint in terms of C and L and show on a diagram an initial optimal choice of C and L, in which both are positive. (b) State this equilibrium algebraically, and briefly explain how it can be derived. (c) Show that, assuming normality of leisure, for some value N*, if N> N*, the individual will choose not to work. Is the initial level of N in your answers to parts a) and b) greater or less than N*?
11. A worker derives utility from consumption, C and leisure, L U = U(C, L) and initially faces the constraints p.C = N+w.H H = 24 - L where p is the nominal price of consumption, N> 0 is unearned income, w is the nominal wage and H is hours worked. (a) Derive the budget constraint in terms of C and L and show on a diagram an initial optimal choice of C and L, in which both are positive. (b) State this equilibrium algebraically, and briefly explain how it can be derived. (c) Show that, assuming normality of leisure, for some value N*, if N> N*, the individual will choose not to work. Is the initial level of N in your answers to parts a) and b) greater or less than N*?
Chapter6: Demand Relationships Among Goods
Section: Chapter Questions
Problem 6.9P
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