Write out the equation for budget line

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Reference no: EM132200722

Question: Matt works an 8 hour shift in a factory. His utility function is U(S, M) = S ^.2 M^8 (S to the .2 power and M to the .8 power) , where S is his hours in the day spent shirking and M is his daily income. For every hour of work, Matt is able to produce 2 units of output every hour he puts in effort (ie. does not shirk). Suppose Matt is offered a piece rate contract, where he earns $10 per unit of output he produces each day.

Draw a graph showing Matt's budget set and write out the equation for his budget line.

Calculate Matt's optimal time spent shirking, time spent working, and income under the piece rate contract described in part a. Suppose that Matt is offered a choice between the piece rate contract and a fixed hourly wage of $10. Assume there is no worker monitoring in place. Which will he choose? Use a calculation to show which choice he prefers.

Reference no: EM132200722

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