2007FALL-HW2-Solutions - 1. Suppose that the representative...

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Unformatted text preview: 1. Suppose that the representative consumers utility function is given by U ( C,l ) = C 1 / 3 l 2 / 3 . Assume that the consumers yearly time endowment is h . The consumers wage rate is w and he also earns non-wage income . The government collects a lump-sum tax T from the consumer. (a) Write down the budget constraint of the consumer. (b) Write down the consumers optimality condition. (c) Using the consumers optimality condition and the budget constraint, solve the consumers optimal consumption C , leisure l, and labor supply N S . (d) Assume that h = 5000 hours, wage rate w = $10 per hour, = $20000, and T = $10000 . What are the consumers optimal choices ( C , l , and N S ) for these parameters? Calculate the consumers util- ity. (e) Now assume that the wage rate increases to $16 per hour. All other parameters are the same as part (d). Calculate C , l , and N S again....
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2007FALL-HW2-Solutions - 1. Suppose that the representative...

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