04 Jun Question Romeo works in a machine factory. He can work as
Question
Romeo works in a machine factory. He can work as many hours per day as he wishes at a wage rate of w. Let C be the number of dollars he spends on consumer goods and let R be the number of hours of leisure that he chooses. Romeo earns $8 an hour and has 18 hours per day to devote to labor or leisure, and he has $16 of non-labor income per day.
5.1. [6 points] Write an equation for his budget between consumption and leisure. Use blue ink to draw his budget line in a graph. His initial endowment is the point where he does no work and enjoys 18 hours of leisure per day. Mark this point on the graph with the letter A.
5.2. [6 points] If Romeo has the utility function U(R, C) = C·R, how many hours of leisure per day will he choose? How many hours per day will he work?
5.3. [6 points] Suppose that Romeo wage rate rises to $12 an hour. Use red ink to draw his new budget line. (He still has $16 a day in non-labor income.) If he continued to work exactly as many hours as he did before the wage increase, how much more money would he have each day to spend on consumption?
5.4. [6 points] Suppose that Romeo still receives $8 an hour but that his non-labor income rises to $48 per day. Use black ink to draw his budget line. How many hours does he choose to work?
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