Question: 4 4. (20 points) In this problem, you can assume that the optimal choice is interior. Let Franco's utility function be U(C,L) = 2log(C) +

4. (20 points) In this problem, you can assume that the optimal choice is interior. Let Franco's utility function be U(C,L) = 2log(C) + 6log(L). Let T denote time available to split between leisure and work, w denote the wage rate and V 0 denote non-labor income (as in class). (a) Derive his optimal choice as a function of w, T, and V .

(b) Calculate the first derivative of his optimal leisure choice with respect to w. Does the substitution effect dominate the income effect? Is this also true if V = 0?

(c) What is Franco's reservation wage as a function of w, T, and V ? Is it increasing, decreasing or constant in V ? Why?

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