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1. (24 points) The consumer's problem is max U = u (C, I) CLN s.t. C = WN +II-T N+L = H The optimality conditions
1. (24 points) The consumer's problem is max U = u (C, I) CLN s.t. C = WN +II-T N+L = H The optimality conditions are wuc (C*, L. ) = up (C', I.) * = WN; + II -T (1) H = L' + N; The utility function over consumption C and leisure L is given by u ( C, I) = COLI-, 0 0). (c) (6 points) Derive and explain the impact of an increase in w on consumption, leisure, and labor supply while referring to and clearly explaining its substitu tion and income effects (assume that II - T > 0). d) (2 points) Find the level of the wage rate such that the consumer would find it optimal to supply no labor, refer to it as w
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