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(Solved): Consider an economy with two types of households: A and B. Their preferences can be represented by t ...



Consider an economy with two types of households: A and B. Their preferences can be represented by the following utility functions: Household A: U(c,l)=c+log(l) Household B: U(c,l)=(c^(1-\gamma ))/(1-\gamma )+l The budget constraints for both households are similar and are given by: c=w(h-l)+\pi -Tc>=0,l>=0,h>=l \pi -T=0, and \gamma >0. Find the optimal consumption, leisure, and labor supply for each household. What are the effects on optimal consumption, leisure and labor supply of an increase in wages (w) in household A? Provide both an intuitive and mathematical answer as discussed in class. What are the effects on optimal consumption, leisure and labor supply of an increase in wages (w)\gamma . Hint: it may be useful to provide answer based on \gamma -=1 \gamma <=1 Since in this economy there are only these two households, find the aggregate consumption (C), aggregate leisure (L), and aggregate labor supply (N).



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