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Consider the static labor supply model discussed in class, and assume U(c,l) = C0.2l(0.8). A worker...

Consider the static labor supply model discussed in class, and assume U(c,l) = C0.2l(0.8). A worker chooses his level of labor supply and consumption according to the following maximization problem:1 maxU(c,l) = c0.2 ×l0.8, s.t. C ≤ wh + Y h = 18−l C,l ≥ 0 a) Assume that non-labor income Y = 100$ and that the wage rate is w = 10$/hour. Find the individual’s optimal level of labor supply (h) and his optimal level of consumption (c). b) What happens if the wage increases to w = 12? Find the effect of a change in wage on labor supply. d) For this individual, which effect is larger when the wage increases: The income effect or the substitution effect? e) Find the effect of a change in non-labor income Y on labor supply. f) Find the worker’s reservation wage.
Question 2 Consider the static labor supply model discussed in class, and assume U(c,l) = C0.2l(0.8). A worker chooses his level of labor supply and consumption according to the following maximization problem:1 maxU(c,l) = c0.2 ×l0.8, s.t. C ≤ wh + Y h = 18−l C,l ≥ 0

e) Find the effect of a change in non-labor income Y on labor supply.

f) Find the worker’s reservation wage.

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b.d. & e.f.

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