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Question

1. Assume the following utility function U(c, l) = c1/3 l2/3 implying the relative

importance of the consumption and leisure are,

1/3 and 2/3 respectively. Given the budget constraint cP=W(24-l), in which W=$20 and P=$5, solve for the optimal consumption(c) and leisure(l) and labor supply (h) for this consumer.



2. What would happen to the optimal consumption (c), leisure (l) and labor supply (h), in the above question Q1 if the government offers a lump sum subsidy of $2000 for each family? You don't need to solve this numerically, but may answer to the question graphically using the budget set. (Hint: A lump sum subsidy implies that there is an increase of income even when you don't work at all.)

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