Determine the optimal consumption bundle

Reference no: EM13222580

Consider the consumer optimization problem we have studied in class. Suppose that consumption good and leisure are perfect substitutes, namely preferences of the consumer are represented by the utility function
U(C,L)=aL+bC
where a and b are positive constants.

a. Show what the consumer's indifference curves look like and determine both graphically and algebraically what consumption bundle (C,L) the consumer chooses. Show that optimal consumption bundle depends on the relationship between a/b and w, and explain why.

b. Now suppose that the utility function is given by
U (C,L) = min(C,aL)
where a is a positive constant. Determine the optimal consumption bundle (C*,L*) in terms of a, w, h, π and T .

Reference no: EM13222580

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