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March 31 , 2010

Calculation of Optimum Combination of Consumption and Leisure


"Mike’s utility of consumption and leisure is U(C, L) =C*L, so that his marginal rate of substitution is C/L. There are 168 hours in the week and he earns $10 an hour.
a) What is his optimal combination of C and L?
b) If the government starts a welfare policy that pays B to all non workers and 0 to all workers, at what value of B will Mike opt out of the labor force and go on welfare?

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