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2 Labor Supply Elasticities Suppose that individuals have the following utility function on consumption and labor L: U(C, L) = CL7)2 If an individual works
2 Labor Supply Elasticities Suppose that individuals have the following utility function on consumption and labor L: U(C, L) = CL7)2 If an individual works L and has wage w, he earns wL. Non-market time is defined as h =1 L, where 1" is the time endowment. All individuals have the same wage rate w. a) Assume that there is no tax and that individuals have no other income but their labor income. Solve for the labor supply L as a function of w that maximizes the utility of the individual. h) Now, the government imposes a linear tax on labor income at rate 0
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