When time is an important constraint on a consumer’s choices, the consumer’s choice problem (when 3 activities x₁ , x₂ , and x₃ are chosen) is

 

MaxU (x₁, x₂, x₃) +  (M - p₁ x₁ - p₂ x₂ - p₃ x₃) + µ (T - x₁ - x₂ - x₃)

 

a)Interpret the multipliers ? and µ. What is each measuring?

b)Derive the first order condition for best choice for one of the activities, say 1 x .Arrange this so that it has the form marginal benefit equals marginal cost, and explain what the marginal benefit and marginal cost terms refer to.

c)What is the value of the consumer’s time in this model?