Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Question 1 Consider an economy consisting of one consumer, one firm, and two commodities: consumption (3 and leisure/labour E. The consumer is endowed with one

image text in transcribed
Question 1 Consider an economy consisting of one consumer, one firm, and two commodities: consumption (3 and leisure/labour E. The consumer is endowed with one unit of leisure time and zero units of consumption. Given 6 units of consumption and 2 units of leisure, their utility is given by u(c, 1?) : lnc+ alnf, for some parameter or > 0. Suppose that the price of consumption is normalised to 1. In addition, we assume that any time that is not devoted to leisure can be sold as labour at price it). Finally, as the sole shareholder, the consumer has rights to all the profits 7r generated by the firm. The technology ofthe firm is given by FUD) : x/E, where L units of labour is transformed into FUD) units of consumption. The objective ofthe price-taking firm is to maximise profits 71' = F(L) wL, given the price in. As stated above, all profits are transferred to the consumer as a lump sum. (i) Write down the optimisation problem of the consumer. Show that the demand for consumption and leisure is given by C = LIUTT and E = % by the consumer to the labour market? , respectively. How much labour time is supplied [7 marks] (ii) Solve the optimisation problem ofthe firm. Show that the demand for labour is given by L = 1/?112. How much consumption is being produced given the price of labour in? How high are the profits generated by the firm? [7 marks]

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Research In Forest Economics And Forest Policy

Authors: Marion Clawson

1st Edition

1317362624, 9781317362623

More Books

Students also viewed these Economics questions