Consider an economy consisting of consumers living for one period. Let dividends be higher than lump sum taxes, and also let the substitution effects dominate in all cases. Answer the following questions.

a) Write down with equations the optimization problem of the consumer: what does she try to maximize? What is her constraint(s)?

b) Draw the consumer’s constraint(s); mark on the graph what the axes are, what is the slope, and where does the line cuts the axes. [

c) Make a separate graph with the consumer’s budget constraint, an indifference curve and indicate on the graph the optimality point as A. Write down the optimality condition for the consumer. Explain intuitively the optimality condition for the consumer

Answer rating: 100% (QA)

a The consumers b The This maximize St consumption leisme H Time availabl... View the full answer