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1. (25 points). Suppose household preferences are described by the utility function 1 U (C, l) = aC (B 1) - ( - where C
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1. (25 points). Suppose household preferences are described by the utility function 1 U (C, l) = aC (B 1) - ( - where C stands for consumption of market goods and stands for leisure. For simplic- ity, assume there is no government in this economy. (a) Assuming the market (real) wage is w and the total amount of time available is h, derive expressions for the household's consumption and labor supply decisions as a function of w and h. (For simplicity, assume the household has no nonmarket income). Does the income effect ever dominate the substitution effect? How does labor supply depend on income and consumption? Explain intuitively
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