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Consider a utility function:U(c,l) = (1-α) log (c) +αlog (l), whereα >0.
(a) Suppose that the consumer has one unit of time,w= 0.75,π= 0.8, and T= 1.0.
Determine the consumer's optimal choice of consumption and leisure, and show this in a diagram.
(b) Now suppose that wage double,i.e. w= 1.5. Again, determine the consumer's optimal choice of consumption and leisure. Use a graph to show how and why the consumer's optimal consumption bundle changes, with reference to income and substitution effects.
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