Question
Consider a utility function that is consumption and leisure are perfect complements: min(c, L), where > 0. (a) Suppose that the consumer has one unit
Consider a utility function that is consumption and leisure are perfect complements: min(c, L), where > 0. (a) Suppose that the consumer has one unit of time, w = 0.75, = 0.8, and T = 1.0. Determine the consumer's optimal choice of consumption and leisure, and show this in a diagram. (b) Now suppose that wage double, i.e. w = 1.5. Again, determine the consumer's optimal choice of consumption and leisure, and show this in your diagram. Explain how and why the consumer's optimal consumption bundle changes, with reference to income and substitution effects.
**T stands for lump sum taxes
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