PROBLEM 1
Two widows, Rosie and Ethel, have identical preferences, and identical wage rates. Rosie has no non-labor income but Ethel receives an income from her late husband's pension. Assuming that leisure is a normal good, who will work more hours? Use a graph to explain your answer.
PROBLEM 2
Suppose that Lesley’s utility function is given by u(I) = √10I (square root of 10I), where I = income in thousands of dollars.
Suppose that Lesley is currently earning an income of $40,000 and she can earn that income with certainty next year. She is offered a chance to take a new job that offers a .6 probability of earnings $44,000 and a .4 probability of earning $33,000. Given her utility function, should she take the new job? (That is, would taking the job be the optimal choice for her.)