Only question (e) need to be answered, thanks a lot.? Suppose now that Jeff\'s u

Question

Only question (e) need to be answered, thanks a lot.?

Suppose now that Jeff's utility function is U = c^0.5 - l^0.5. How does Jeff regard l now? How is this similar or different from the way he regards l in Question I? (Do you think that some people have utility functions with this property? Why might they, in practical terms?) Draw Jeff's indifference map (you don't need to he mathematically precise in doing this-just capture the general features of the indifference curves for this situation). What happens to the slope of any indifference curve as c increases? Given that he has non-labor income of y, can work at the hourly wage w, and can buy c at the price p_c per unit, illustrate the (l, c) combination that maximizes Jeff's utility. Suppose Jeff's wage rate rises from w_1, to w_2 (i.e., w_1

Explanation / Answer

e) The shape seems to be backward bending. The tendency to work more or less at high income level has a direct relation with income effect and substitution effect. While the income effect induces a typical worker to enjoy more leisure at high income level, the substitution effect refrains the worker from enjoying ‘more expensive leisure’. The two effects always work in tandem, giving this shape.

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