Xiao-Ping Work and Leisure

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Xiao-Ping Work and Leisure

She has $8 per day of non-labor income, and she works at a job that pays $8 per hour. Her preferences over leisure time R  and dollars spent on consumption Care represented by the utility function U(C,R) = CR. What is her optimal level of daily expenditure on consumption, her optimal leisure time, and the amount of time she devotes to work? Sketch her budget line in blue ink in leisure-consumption space with leisure on the horizontal axis and consumption expenditure on the vertical axis. Next suppose that Xiao-Ping’s non-labor income increases to$16 per day. Sketch her new budget line in red ink, and calculate her new optimal levels of consumption and leisure. How much does she work now? Calculate the total income and substitution effects on leisure and consumption due to the change in her income. (You do not need to decompose the total income effect into ordinary and endowment income effects.) Please complete all parts to the question and show all work.