Let Karl’s utility function be U(C, L) = C^2 + 9L^2. Suppose he has 100 hours to split between work and leisure and he has no non-labor income. (a) What is Karl’s reservation wage? (b) Repeat for An.
a. (a) Karl's reservation wage is the wage at which his marginal utility of income equals the marginal disutility of work. It can be found by equating the marginal utility of income with the marginal disutility of work in the utility function.
b. (b) To find An's reservation wage, we need information about An's utility function and the trade-off between income and leisure.