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Suppose that a representative consumer has the following utility function: U(C,L)=5ln(C)+2ln(L) and she has the budget...

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Economics

Suppose that a representative consumer has the following utilityfunction: U(C,L)=5ln(C)+2ln(L) and she has the budget constraintw(h-L)+pie-T. Derive the consumer's rules for consumption andleisure (solve for consumption and leisure \"demand functions\" as afunction of exogenous variables).

Graph and discuss the income and substitution effects for aconsumer if her wages decreased (with labels).

Answer & Explanation Solved by verified expert
4.0 Ratings (735 Votes)
The above scenario can be shown in the diagram as follows Thebudget constraint is shown as ABh with a kink at h pie ie thenonlabor income If all the hours are alloted to labor ieleisure0 then wage income wh and after paying tax of T theremaining income is whT    See Answer
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