Econ 101
Javier Birchenall
Due date:
Tuesday, October 20, 2009
Problem set 3: Optimality, equilibrium, and e
ﬃ
ciency
The following problem set will acquaint you with some basic general equilibrium tools such as the
f
rst and
second welfare theorems. Plan to spend 8 hours (maybe more) on these questions. Please return the problem
set on time (next Tuesday during class), remember you have the chance to miss one and only one, use it
wisely. If you have any problems regarding the questions please contact me or your TA immediately. Good
luck!
Please remember to show your work and write your section.
I. The labor market (35%)
As in Pset 2, this problem considers the decisions of a consumer whose preferences are given by:
u
(
C, l
)=
C
+2
√
l
,
in which
C
is the quantity of consumption and
l
is the quantity of leisure. The consumer faces two constraints.
The time constraint is given by
l
+
N
s
=1
with
N
s
as the time spent working (or the labor supply). Notice
that we have assumed
h
=1
without loss of generality. We have also assumed that
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 Fall '08
 DUMBASS
 Economics, Supply And Demand, basic general equilibrium

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