2007FALL-HW2-Solutions

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

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Unformatted text preview: 1. Suppose that the representative consumer’s utility function is given by U ( C,l ) = C 1 / 3 l 2 / 3 . Assume that the consumer’s yearly time endowment is h . The consumer’s wage rate is w and he also earns non-wage income π. The government collects a lump-sum tax T from the consumer. (a) Write down the budget constraint of the consumer. (b) Write down the consumer’s optimality condition. (c) Using the consumer’s optimality condition and the budget constraint, solve the consumer’s optimal consumption C , leisure l, and labor supply N S . (d) Assume that h = 5000 hours, wage rate w = \$10 per hour, π = \$20000, and T = \$10000 . What are the consumer’s optimal choices ( C , l , and N S ) for these parameters? Calculate the consumer’s 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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