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Suppose There Are Two Goods, Consumption C with Price P

Question 73

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Suppose there are two goods, consumption C with price p = 1 and leisure L with price w = 8. The endowments of the two goods are given by C0 = 0 and L0 = 2 4. The utility function is U(C,L)= logC + 2logL.
i)How much labour should be supplied and how much consumption should be chosen?
ii)Using all the information given above (except w = 8), show that the amount of labour supplied will be the same regardless of the wage rate. What must be true about income and substitution effects for this to occur?

Correct Answer:

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i)L = 8; C = 64;
ii)It is alwa...

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