Ed is a programmer, who has preferences over the consumption good and leisure gi

Question

Ed is a programmer, who has preferences over the consumption good and leisure given by U(C, l) = Cl. He needs to use at least 8 hours a day for sleep, eating, etc., but he can in principle work the remaining 16 hours a day. That is, h = 16. Ed has a daily non-wage income of $80, and the taxes are zero. Suppose Ed's wage is $20 per hour. How much does Ed choose to work? How much does he spend on consumption? Suppose Ed's wage has increased to $40 per hour. How much does he work now? How much does he spend on consumption? Does the income or the substitution effect dominate for Ed? Suppose Ed's wage is still $20 per hour, but his daily non-wage income doubled. How much does he work and spends on consumption now? If Ed could choose between the increase in the non-wage income described in part (c) (while keeping his wage at its old level) and the increase in wage described in part (b) (while keeping the non-wage income at its old level), which one would he prefer to have? Explain your answer.

Explanation / Answer

a). h =4 hrs

b). h = 2hrs

c) h = 8 hrs

d) he choose b) because in less number of hour he earned more

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