Only question (e) and (f) need to be answered, thanks a lot.? (4) Lois and Clark
ID: 1203847 • Letter: O
Question
Only question (e) and (f) need to be answered, thanks a lot.?
(4) Lois and Clark have the same preferences over leisure and consumption, two normal goods. They also have the same daily nonlabor income $20 and hourly wage rate Sio. But they differ in two ways. Lois lives next to her office, so it takes her no time to commute to work. Clark, however, loses an hour every day commuting if he works at all. If Clark works, his employer provides a clean uniform for him every day. Lois, however, must have a clean business suit every day she works; if Lois works, her daily dry-cleaning cost is $5. Assurne the price of the consumption good is $1. consumption (units/day) 100 90 80 70 60 50 40 30 20 0 2 4 6 810 12 14 leisure (hours/day)-Explanation / Answer
e) Since the leisure preference of both Lois and Clark are the same, and Clark requires one hour to commute, Lois works a longer workday, as Clark will work one hour elss due to commuting. Since leisure preference of both the workers are same, te work hours including the commuting time will be the same for both the workers.
f) The utility function is given by the equation:
wT - wL = wH (w being the wage rate, T being total hours available and L being leisure hour preference)
An increase in dry cleaning cost for Lois would affect her reservation wages and cut into her consumption costs. To earn the same amount, she would then have to work additionally, and reduce her leisure hours. As a result, her choice of optimal utlity will be affected, hence with additional cost of dry cleaning, she will be less likely to work.
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