Suppose that you have the following utility function: U(L,Y) = LY + 2Y, where L is hours of leisure and Y is other goods. The price of Y is 1. For now suppose that wages are your only source of income. There are 24 hours in a day.
- Assume that your hourly wage is 1. Write down your budget constraint.
- How many hours of labour would you supply when your hourly wage is 1? You can use any method you want.
- Now suppose that your hourly wage increases to 2. How many hours of labour would you supply now?
- Finally, imagine that you have received an inheritance which always pays you 8 dollars per day. The hourly wage is still 2. How many hours of labour will you supply?