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The following question will compare the labor leisure choice of two women, Jill and Kayla. Both...

The following question will compare the labor leisure choice of two women, Jill and Kayla. Both women have 168 hours that they could use in the week for work. Jillloves impressing herfriends with all of the latest and greatest material goods. The following utility function describes herpreferences: U(C,L) = C2L where C represents herconsumption of goods and services and L University of California, DavisProfessor Jenna StearnsDepartment of EconomicsWinter 2018represents herleisure time. She gets $200 per week from a trust fund. Kaylareally enjoys spending time with herchildren. The following utility function describes herpreferences: U(C,L) = CL2where C represents consumption of goods and services and L represents leisure time. Kaylagets $200 per week from past investments (from all of the money that she previously saved).

a.Calculate Jill’s reservation wage.

b.Calculate Kayla’s reservation wage.

c.Supposethere is a big campaign insisting that all Americans get ten hours sleep at night in order to pursue good health. Both Jilland Kaylanow see the totalpossible work hours in their week falling to 98. What would be the effect on their reservation wages? What would this do for the gap in their reservation wage?

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Answer #1

We consider L= number of hours they can work to see the maximum amount of time they are indifferent.

a) Jill's reservation wage is the wage offer that makes her indifferent between working and not working =

MUL/MUC = C/2*L = 200/336 = $0.59 per hour

b) Kayls's reservation wage = MUL/MUC = 2*C/L = 400/168 = $2.38 per hour

c) Reservation wages change due to decrease in number of hours

Jill's new reservation wage = $1.02 per hour

Kayls's new reservation wage =$ 4.08 per hour

The gap between their reservation wages will increase.

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