Answer to Question #69345 in Economics for Derek West

Question

Bobby has a job in which he earns $30 per hour. He values Income (Y) and Leisure, (l). He has 400 hours a month available to spend working or at leisure. His utility function is U(l,y)=l.4y.6, which implies that the MU of l is .4l-.6y.6 and MU of Y is .6l.4Y-.4.

a. How many hours a month does Bobby work? What is his income?

b. The government institutes a welfare program that guarantees individuals $2000/month. The guarantee is phased out immediately with the first dollar of income earned. How many hours does Bobby work? What is his income?

c. The government revises its welfare program so that the phase-out rate is 1/3. Every dollar earned working lowers the transfer from the government by 1/3 dollars. How many hours does Bobby work?

Answer 1

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