Question: An individual has preferences given by the utility function U ( C , L ) = C . L . The person has no non

An individual has preferences given by the utility function U

(

,

) =

.

.

The person has no non

-

earned income, a wage rate of

10

TL an hour, and can choose any amount of total time, T

= 80,

to work in a week.

.

What is the person's optimal choice of weekly labor supply? How much is his weekly earnings?

.

Now a government program is introduced which pays a weekly benefit equal to

150

TL minus

0.25

times the person

s earnings. He chooses labor supply subject to this new budget constraint. What will be his new optimal labor supply? How much will he earn? How much benefit does he receive? What is his total income? Has the program increased his income? Has it increased his utility?

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