Assume Lorena derives utility from consumption and leisure. Through thefollowing utility function. U=VC-R where C is consumption and R is hours ofleisure consumed per day (there are 24 hours in her day).Let w be the wage rate and H be the hours of work chosen. The price ofconsumption goods, C, is $1. In addition, assume Lorena has $M amount of non-wage income each day.Set up the utility maximizing Lagrangian needed to maximize utilitysubject to the budget constraint but do not solve for the demand for C and R.ab.Draw the consumer choice model for this situation (fully label thegraph). Use it to graphically derive/describe/explain her labor supply functionand explain what would be true for her labor supply to rise or fall when thewage rises (you may want to draw the graph twice.Measure and explain the loss in consumer surplus using the concept ofcompensating variation.g.h.What is the expenditure-price elasticity equation for y? That is, the elasticity forthe % change in expenditure on y when there is a 1% change in the price of y.

Only the first two parts will be solved because the next two parts seem to be unrelated to the…

a b. Set up the utility maximizing Lagrangian needed to maximize utility subject to the budget constraint but do not solve for the demand for C and R. Draw the consumer choice model for this situation (fully label the graph). Use it to graphically derive/describe/explain her labor supply function and explain what would be true for her labor supply to rise or fall when the wage rises (you may want to draw the graph twice.

a b. Set up the utility maximizing Lagrangian needed to maximize utility subject to the budget constraint but do not solve for the demand for C and R. Draw the consumer choice model for this situation (fully label the graph). Use it to graphically derive/describe/explain her labor supply function and explain what would be true for her labor supply to rise or fall when the wage rises (you may want to draw the graph twice.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter16: Labor Markets

Section: Chapter Questions

Problem 16.10P

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