Mia is a registered nurse. She has 18 hours per day to devote to labor or leisure, and has $20 nonlabor income per day. She is paid $10 per hour for the first 8 hours of work and $15 per hour for overtime (for hours worked over 8 hours). Mia’s preferences are represented by U(C,R) = CR utility function, where C is the amount of dollars she spends on consumer goods and R be the number of hours of leisure that she chooses.

Part a: Assuming she can work as many hours per day as she wishes, draw Mia’s indifference curves, budget constraints and solve for her optimal consumption and leisure choices.

Part b: Suppose that Mia’s wage rate rises to $11 an hour for the first 8 hours. She is still paid $15 per hour for overtime. Again, find her optimal choice. Decompose the total change in demand due to a price change into a substitution effect, ordinary income effect and endowment income effect and graphically demonstrate each effect.

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Step 12 To maximize her utility Mia must choose the combination of consu... View the full answer