Determine the consumer optimal choice of consumption

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Reference no: EM132130568

Question - Consider the consumer choice example, where consumption and leisure are perfect complements. Assume that the consumer always desires a consumption bundle where the quantities of consumption and leisure are equal, that is, a = 1.

(a) Suppose that w = 0.75, π = 0.8, and T = 6. Determine the consumer's optimal choice of consumption and leisure, and show this in a diagram.

(b) Now suppose that w = 1.5, π = 0.8, and T = 6. Again, determine the consumer's optimal choice of consumption and leisure, and show this in your diagram. Explain how and why the consumer's optimal consumption bundle changes, with reference to income and substitution effects.

Reference no: EM132130568

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