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2. Stephan's labor supply. Stephan's preferences over consumption and leisure are represented by the utility function u(c, 1 l) = a ln(c) + (1 a)
2. Stephan's labor supply. Stephan's preferences over consumption and leisure are represented by the utility function u(c, 1 l) = a ln(c) + (1 a) ln(1 l), where c is Stephan's favorite consumption basket (whose price is p = 1) and where l represents the fraction of time that Stephan spends working. The market wage for Stephan's skill level is $11, on which he pays taxes at the 20% rate. It follows that a supply of l yields labor earnings w(1 T)l = 11 x (1 0.2) x l. Assume that o: = 1/2 and that Stephan has no other sources of income. (a) Compute Stephan's labor supply. Hint: Solve assuming that Stephan has other sources of income I. Express net wages as w(1 -T). Replace I = 0, w = 11 and 7 = 0.2 only at the end of your calculations. (20 points)
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