Suppose the period-t utility function, ut, is ut = ln ct + b (1 t ) 1 /(1 ), b > 0,

Suppose the period-t utility function, ut, is ut = ln ct + b (1 − t )

1−γ

/(1 − γ ), b > 0,

γ > 0, rather than (5.7).

(a) Consider the one-period problem analogous to that investigated in (5.12)

(5.15). How, if at all, does labor supply depend on the wage?

(b) Consider the two-period problem analogous to that investigated in (5.16)

(5.21). How does the relative demand for leisure in the two periods depend on the relative wage? How does it depend on the interest rate? Explain intuitively why γ affects the responsiveness of labor supply to wages and the interest rate.