Question

13) Consider the standard labor-leisure choice model. Consumer gets utility from consumption
(C) and leisure (L). She has H total hours. She works N S hours and receives the hourly wage, w.
She has some non-labor income π and pays lump-sum tax T. Further suppose (π – T) > 0. The
shape of utility function is downward-sloping and bowed-in towards the origin (the standard U-
shaped case just like a cobb-douglas function) If this consumer decides to NOT WORK AT ALL,
then it must be the case that
A) |MRS L,C | = |w|
B) |MRS L,C | < |w|
C) |MRS L,C | ≥ |w|
D) MU L = MU C
E) None of above

Answer 1

Answer is option B)

MRS L,C = MUL/MUC

If MUL/MUC < W

MUL/W < MUC

So if MRS < W

Then , only leisure is enjoyed,

no work is done at all , only non labor income , π is Consumed