How does this public policy alter the reservation wage

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Reference no: EM133531530

Question 1: A person receives utility from consumption C and leisure L. The maximum number of hours that a person can allocate to work for pay or other uses is 110 hours. The utility function is U(C,L) = CL. This functional form implies that the marginal rate of substitution between consumption and leisure is C/L. This person receives €50 per week in government transfers and must necessarily allocate 50 hours per week to essential household duties, which are worth €10 per hour. These 50 hours are not leisure and cannot be allocated to work. Compute the reservation wage.

Question 2: Suppose that a technological breakthrough enables this person to carry out these essential household duties in only 40 hours per week (at no cost). How does this technological innovation alter the reservation wage? Provide a concise economic interpretation.

c)Now suppose that the government replaces the cash transfer (permanently) with free childcare, which increases by an additional 20 hours the amount of weekly hours that can be split between leisure and work. How does this public policy alter the reservation wage? Provide a concise economic interpretation.

Reference no: EM133531530

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