HW_08_Solutions

# HW_08_Solutions - HW 8 suggested solutions March 2 2010...

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Unformatted text preview: HW 8 - suggested solutions March 2, 2010 Question 1 - Robinson Crusoe economy Let us normalize p c = 1, p l = w , then firm problem is given by max L AL- wL and the f.o.c. states just that profits are zero, w = A . The consumer problem is given by max c , l c δ δ + l δ δ subject to c + wl ≤ w . For δ < 1 we have an interior solution and hence the f.o.c. is c = w 1 1- δ l , which after substituting into the budget constraint yields c = A 1 1- δ 1 + A δ 1- δ l = 1 1 + A δ 1- δ . Utility is given by u ( c , l ) = c δ δ + l δ δ = 1 δ 1 + A δ 1- δ 1- δ , 1 which is increasing in A for all δ < 1. For leisure demand we have that the income effect dominates the substitution effect for negative δ , dl dA < 0, < δ < 1, dl dA > 0, δ < 0. Question 2 - public radio Let us normalize p c = 1, p R = p , then firm problem is given by max x p 1 2 x- x and the f.o.c. states just that profits are zero, p = 2....
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HW_08_Solutions - HW 8 suggested solutions March 2 2010...

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