Mr. Cog has 18 hours per day to divide between labor and leisure. His utility function is U(C, R) = CR, where C is dollars per year spent on consumption and R is hours of leisure. If he has 19 dollars of nonlabor income per day and gets a wage rate of 15 dollars per hour when he works, his budget equation, expressing combinations of consumption and leisure that he can afford to have, can be written as

Question

Quizplus · Accepted Answer

The budget equation is derived from the total income, which is the sum of nonlabor income and labor income. Mr. Cog has 18 hours per day, so if he works all 18 hours, he earns 18 * 15 = 270 dollars. Adding his nonlabor income of 19 dollars gives a total of 289 dollars. Therefore, the budget equation is 15R + C = 289, where 15R represents the opportunity cost of leisure in terms of foregone wages.

Mr Cog Has 18 Hours Per Day to Divide Between