Answer Happy

Question 1: (100 marks) Emma has a job with a wage of w per hour. She can freely choose how many hours she works per day. This job is her only source of income. She spends all her income on consumption. Her preferences are defined over consumption and hours of free time. Emma maximises her utility. She can allocate 12 hours per day to either free time or working, as she needs the other 12 hours per day for sleeping, meals, etc. c) (280 words) Now assume that the wage per hour was initially w = 18 and is, after the wage cut, w = 16. Emma's utility function is given by Uſt, c) = t(24 - t) + C, where t and c denote hours of free time per day and consumption level per day, respectively. Calculate her optimal consumption levels and hours of free time initially (Le with w = 18) and after the wage decrease i.e. with w = 16). Compare your results and relate them to your analysis in part b). (Recall that she can allocate 12 hours per day to either free time or working.) (40 marks)