Suppose the consumer has a generic utility function U(C, 1) and has h hours available, some...

 

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Suppose the consumer has a generic utility function U(C, 1) and has h hours available, some of which are used as leisure (1) and some supplied to the labor market (NS). Hours of work are paid at the real wage w. The profit income is T. The consumer pays a lump-sum tax T, where T < π. 1. (20%) Discuss what role does the normality of a good assumption play in defining the optimal behavior of the representative consumer. 2. (30%) Provide graphical analysis of a change in optimal behavior of the representative consumer when profit is decreasing. More specifically, what will happen to consumption (C) and labor supplied to the market (NS). Suppose the consumer has a generic utility function U(C, 1) and has h hours available, some of which are used as leisure (1) and some supplied to the labor market (NS). Hours of work are paid at the real wage w. The profit income is T. The consumer pays a lump-sum tax T, where T < π. 1. (20%) Discuss what role does the normality of a good assumption play in defining the optimal behavior of the representative consumer. 2. (30%) Provide graphical analysis of a change in optimal behavior of the representative consumer when profit is decreasing. More specifically, what will happen to consumption (C) and labor supplied to the market (NS).

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