Question

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.

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

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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