Question
Answer this question using calculus. Consider a standard consumer with preferences over consumption and leisure. The utility function is CES (Constant Elasticity of Substitution): u(c,
Answer this question using calculus.
Consider a standard consumer with preferences over consumption and leisure. The utility function is CES (Constant Elasticity of Substitution):
u(c, l) = (ac+ (1a)l)1/,
where 0< a <1, and >0. This is a quasi-concave utility function.
The consumer faces the usual constraints, with the following modifica- tions. First, let= 0. Second, suppose there is a proportional tax on labour income. That is, for every unit of income earned, the consumer pays a tax of.
- (a)Carefully write out the consumer's budget constraint. Explain why the tax enters the way that it does.
- (b)Formally write down the consumer's optimization problem. Include the non-negativity constraints forcandl(but you can ignore them for the remainder of the assignment).
- (c)Write down the Lagrangian function. Give the interpretation of the Lagrange multiplier.
- (d)Derive the necessary conditions.
- (e)Interpret the necessary conditions.
- (f)Explain how you know that the necessary conditions are also sufficient in this case. Why is this important to know?
- (g)Calculate the effect of a change in the tax on the optimal choice of leisure.
Please help. I'm struggling with understanding this question.
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