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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 from the firm. In addition, she pays T units of the consumption good to the government as a lump-sum 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 + h w ( h- l ) + - T- c i (2) 1 c- = 0 , (3) b- w = 0 , (4) w ( h- l ) + - T- c = 0 . (5) Substituting (4) into (3) and (5), we get c = w b , (6) l = h- 1 b + - T w . (7) (b) Suppose that there is an increase in lump-sum taxes, T . Determine the effect of this change on c and l ....
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- Fall '09