+1 862 207 3288 Question 1:
Consider a representative agent with a utility function:
U
(
C;l
) =
C
1
=
3
+
l
1
=
3
that he or she maximises subject to a constraint:
C
=
w
(
h
l
)
T
+
where
w;h;l;C;T
and
are wages, hours of time available, leisure, consumption, taxes,
and dividend income. The production function for this economy is linear so that in
equilibrium
w
=
z
, and the Production Possibilities Frontier is
C
=
z
(
h
l
)
G
Assume
h
= 1
;z
= 4.
(a)
Find the Marginal Rate of Substitution. (4 marks)
(b)
Find the Marginal Rate of Transformation. (4 marks)
(c)
Setting MRS=MRT, solve the resulting equation algebraically for l as a function of
G. (6 marks)
(d)
What happens to consumption, wages and output as G increases? (6 marks)
1
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