Question

(6) Geo's utility function is described as LeY, where Le is hours of leisure per day, and Y is disposable income per day. Geo is employed in a job with a wage of $20 per hour and has 10 hours per day that he can spend in either working or leisure. His income from working is his only source of disposable income. He does not receive any non-wage income Geo can work as many hours as he chooses, up to the limit of 10 hours per day. (a) (2 points) How many hours will Geo choose to work with a wage of $20 per hour? (b) (2 points) How many hours will Geo choose to work with a wage of $5 per hour? (c) (3.5 points) The change in Geo's hours of work due to the decline in his wage can be decomposed into a substitution effect and an income effect. What is the change in his work hours through the substitution effect?

Answer 1

(6)

a. If the wage is $20 per hour then the Geo will choose minimum 8 hours per day. Suppose, if he required to gain the more amount then he afford 10 hours per day.

Per day calculation is = $20 X 8 hours

=$160 per day

Total wage per day Geo attains $160.

OR

In case, if Geo’s utility is more then he chooses 10 hours per day.

So the calculation is = $20 X 10

=$200 per day.

b. If the wage of $5 per hour then the Geo may continue his work for only 5 hours and see any other work in outside in rest of 5 hours or else he may quit the job due to less wage offering per hour. If his utility is more, Geo will continue with 10 hours per day due to the limit of the number of hours in an organization to work.

If Geo decided to work only 5 hours-

So the calculation is = $5 X 5

= $25 per day.

Total wage per day Geo attains $25.

OR

If Geo decided to work only 10 hours-

So, the calculation is = $5 X 10 hours

=$50 per day.

Total wage per day Geo attains $50.

c. If Geo’s wage is less, his working hours will reduce either by himself or by an organization in anything he will continue with equal to 5 hours or less than 5 hours. In this scenario, the substitution effect happens and reduced price will lead to replacing Geo’s rest of hours’ time with a new one.