ONLY NUMBER 10. THANKS 1 The One-Period Model of Households (65] Consider a hous

Question

ONLY NUMBER 10. THANKS

1 The One-Period Model of Households (65] Consider a household who lives for only one period. The household is endowed with h units of time, which can be allocated between leisure I and time spent working. The real wage of the household is w units of the consumption good per unit of working time (i.e, the consumption good is the numeraire). The household also owns some firm stocks, and hence receives dividend income . Finally, the household pays a lump-sum tax T to the government. The household's preferences over the consumption good and leisure ane represented by the utility function U(C,I), which is both monotonic and concave. (Hint C and I are endogenous, and to, h, and T are exogenous.) 1. In the (I,C) space, draw two of the household's indifference curves with different utility levels. What are the properties of the indifference curves? Label clearly which one of the two indifference curves represents a higher utility level. 2. Write down the budget constraint of the household. 3. Are there other constraints that the household's choice must obey? If so, what are them? 4. In the (l,C) space, draw the set of feasible choices of the household (Hint: you should separate the cases when > T and

Explanation / Answer

Answer.10.

MRS = MUc/MUI = 1/C *I/2 = I/2C

So MRS of Consumption is the rate at wich C can be substituted for I.

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