Question 6 Zack derives utility from the consumption of leisure (Le) and all other goods (X). Zack has well-behaved preferences which exhibit…

Question 6  Zack derives utility from the consumption of leisure (Le) and all other goods (X). Zack has well-behaved preferences which exhibit diminishing MRS. Both Le and X are normal goods for Zack He has non-labor income (Io), must pay p for each unit of x he buys and earns an hourly wage (w) for each hour that he works (La). Zack maximizes his utility subject to his budget constraint and chooses to work 40 hours per week.

A.  Illustrate Zack’s utility maximizing choices on the graph below.

B.  Zack’s employer wants to increase the number of full-time workers at the firm and so she offers a bonus of $300 to any employee who works 30 hours or more per week. The bonus is a flat $300 once the worker works 30 hours and does not increase the more hours the employee works over 30 hours. Illustrate the effect of the bonus on Zack’s budget constraint and his utility maximizing choice above. How will the bonus affect the number of hours Zack works?  Explain carefully

 
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