Using utility function to solve for optimal choice
Not what you're looking for?
Suppose that the typical consumer has the following utility function:
U(N, Y) = N×Y,
where Y = income or expenditures on goods, and N = leisure (non-work) hours. The wage rate is given by w = $10. The consumer is initially taxed at the proportional rate of t1 = .4. The consumer has no unearned income (Y* = 0). The time constraint is given by
24 = N + H,
where H is hours of work.
Solve for the optimal choice. Graph this solution. How many hours of work is the consumer working? What is her income?
Can you show me the steps needed to solve the this problem?
Purchase this Solution
Solution Summary
Given a utility function and time constraint, the ideal work/leisure combination is found.
Solution Preview
First, we need to know the marginal rate of substitution (MRS) between leisure and income for this consumer. The MRS describes how much income is worth in terms of leisure. It is the slope of the indifference curve.
We obtain the MRS of substitution by differentiating the utility function. If is U =NY then we differentiate with respect to leisure to get MU(N) = Y and differentiate with respect to income ...
Purchase this Solution
Free BrainMass Quizzes
Economic Issues and Concepts
This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.
Basics of Economics
Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.
Pricing Strategies
Discussion about various pricing techniques of profit-seeking firms.
Economics, Basic Concepts, Demand-Supply-Equilibrium
The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.
Elementary Microeconomics
This quiz reviews the basic concept of supply and demand analysis.