Need as much details as possible. Microeconomics. Peter can work 24 hours a day if he...
Need as much details as possible. Microeconomics.
Peter can work 24 hours a day if he wants to and gets wage w per hour worked. His utility from leisure (work-free time) and consumption is U(C,L)=CL. If the wage of Peter goes up, which of the following statements is always correct?
a. The substitution effect on consumption means that consumption goes up.
b. The total effect on leisure means that leisure goes down.
c. The income effect on leisure means that leisure goes down.
d. The total effect on consumption is zero.
Homework Answers
Answer - Option A
This is because as the amount of wages will rise the expenditure on consumption will increase and also there will be more scope for leisure because of the increase in income and work will be substituted by leisure. Since U = CL...consumption and leisure are directly related , the consumption will rise with the increase in wages.
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