Analyze the impact of the cash grant on Mary’s choice of optimal bundle graphically
Mary has two sources of income, let her non – labor income be represented by V dollars per year. He r labor income comes from working h hours per year in the labor market at wage rate of w per hour. Assume that her utility is a function of composite good, C (measured in dollars and priced at $1) and hours of leisure consumed, L (priced at w per hour). As sume her wage rate per hour is $10, her time endowment is up to 2000 hours per year and her non – labor income V is $3000. Below is her specific Utility Function. U = 100*Ln(C) + 125* Ln (L) A. Determine her specific budget constraint equation. Also graphic ally illustrate her budget constraint with C on the y – axis and hours of leisure consumed, L, on the x – axis. Clearly label everything including the intercepts, x – and y – axis and the slope of the budget line. B. Now solve for the optimal consumption bundle for Mary and identify the optimal values for C (C*) and L (L*). C. At the optimum, determine her level of utility. D. Now assume, the government decides that Mary qualifies for a cash grant welfare program where s he would be entitled to $3000 per year. What would this cash grant do to her non – labor income V? How would V and w change? Illustrate the impact of the cash grant on Mary’s choice of optimal bundle graphically. At her new optimum, what would happen to her hours of leisure consumed?
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