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Unformatted text preview: York University Department of Economics Professor Ahmet Akyol AS/ECON 2400  INTERMEDIATE MACROECONOMIC THEORY I A Practice Question 1.35 points Consider the representative consumer with preferences over the consump tion good, c , and leisure, l described by the utility function U ( c,l ) = ln c + bl (1) where b > 0. She faces a wage rate, w , in the labor market. She also receives dividend income π from the firm. In addition, she pays T units of the consumption good to the government as a lumpsum tax. (a) Set up the Lagrangian and solve for the demand of the consumption good, c , and the leisure, l . L = max ln c + bl + λ h w ( h l ) + π T c i (2) 1 c λ = 0 , (3) b λw = 0 , (4) w ( h l ) + π T c = 0 . (5) Substituting (4) into (3) and (5), we get c = w b , (6) l = h 1 b + π T w . (7) (b) Suppose that there is an increase in lumpsum taxes, T . Determine the effect of this change on c and l ....
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 Fall '09
 TASSO
 Economics, Supply And Demand, wage rate, zk

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