Question

Suppose Mary has utility U = C+20L i.e. Mary gets the same utils from $20 of...

Suppose Mary has utility U = C+20L i.e. Mary gets the same utils from $20 of consumption or 1 hour of leisure. Further, assume that Mary can make $15/hour at her job and has absolutely no savings. Lastly… assume Mary must sleep 8 hours a day (which counts as neither work nor leisure), but can work and/or leisure up to the remaining 16 hours (with fractional hours of work / leisure allowed as well). Mary is trying to figure out how to spend her day.

  1. Draw Mary’s budget set i.e. draw all combinations of consumption and Leisure Mary can afford.
  2. On a separate graph draw 2 indifference curves: one showing all points where Mary has 20 utils and another where Mary has 40 utils.
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Answer #1

(a) Mary's budget constraint would be , for N be the labor hours. As the maximum Mary can work is 16 hours, we have L+N=16, and hence, the constraint would be or . For the given wage, we have the constraint as . The graph is as below.

(b) The two lines would have the equation and . The graph is as below (note that to be clean, the graph is scaled).

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