Short Answer Questions 1. Cindy gains utility from consumption C and leisure L.

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Short Answer Questions
1.
Cindy gains utility from consumption C and leisure L.

Short Answer Questions
1.
Cindy gains utility from consumption C and leisure L. The most leisure she can consume in any
given week is 110 hours. Her utility function is U(C, L) = C * L. This functional form implies
that Cindy’s marginal rate of substitution is C / L. Cindy receives $660 each week from her
great-grandmother–regardless of how much Cindy works. What is Cindy’s reservation wage?
2.
Shelly’s preferences for consumption and leisure can be expressed as
U(C, L) = (C – 100) * (L – 40).
This utility function implies that Shelly’s marginal utility of leisure is C – 100 and her marginal
utility of consumption is L – 40. There are 110 (non-sleeping) hours in the week available to split
between work and leisure. Shelly earns $10 per hour after taxes. She also receives $320 worth of
welfare benefits each week regardless of how much she works.
(a) Graph Shelly’s budget line.
(b) What is Shelly’s marginal rate of substitution when L = 100 and she is on her budget
line?
(c) What is Shelly’s reservation wage?
(d) Find Shelly’s optimal amount of consumption and leisure.

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