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Income and leisure. Currently, Margarida’s marginal rate of substitution of leisure for income is $20/hour. Margarida...

Income and leisure. Currently, Margarida’s marginal rate of substitution of leisure for income is $20/hour. Margarida works as a freelancer earning $15/hour. Should Margarida work more or fewer hours? Justify your answer.


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Answer #1

Margarida's marginal rate of substitution of leisure for income = $20/hour.

Wage = $15/hour.

Because MRS of leisure for income is greater than the wage rate , therefore it would be beneficial and utility maximizing condition for Margarida to work fewer hours and rest more.

Because as he works for fewer hours and rest more ,MUleisure decreases and MUincome increases , which results in decrease in MRS of leisure for income and reach at the utility maximizing condition.

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