ECON 208 Lecture Notes - Lecture 10: Slutsky Equation, Search Theory, Utility Maximization Problem

• School: McGill University
• Department: Economics
• Course: ECON 208
• Professor: El- Attar Mayssun

Document Summary

Fixed amount of time 24 hours of the day, the question is how it is allocated between work, sleep, consumption and leisure. When working a wage of w per hour is earned. When not working the individual is consuming (c) or enjoying leisure (h). Utility is a function of consumption (c) and leisure (h). Utility is maximized subject to the time constraint that the time spent working (l) plus leisure time (h) has to be equal to. The opportunity cost of consuming leisure is w per hour. It is equal to earnings foregone by not working. Maximize utility subject to the full income constraint: L = u (c, h) + (24w c wh) In order to maximize utility, given the real wage, w, the individual should choose to work that number of hours for which the marginal rate of substitution of leisure for consumption is equal to w.