● Market Prices o Prices o Price of consumption normalized to one o Price for n is real wage W
Market Prices Prices: ⚫ Price of consumption normalized to one ⚫ Price for N is real wage w 5
The household's problem in ●●● the Market Economy o Utility function U(C, D) o C: Consumption(coconuts) ∶: Leisure o Budget constraint o Consumption expenditure equals income from capital and labor .C=wN+P-T o p is given, capital income o n is given by time constraint: n=h
The Household’s Problem in the Market Economy Utility function U(C,l) ⚫ C: Consumption (coconuts) ⚫ l: Leisure Budget constraint ⚫ Consumption expenditure equals income from capital and labor ⚫ ⚫ p is given, capital income ⚫ N is given by time constraint: N=h-l 6 s C wN p T = + −
●● The Consumers Preferences o Utility function U(C, D) o Assumptions o More is better than less U>0,u>0 o Diversity is good: Falling MRS o Consumption and leisure are normal goods
The Consumer’s Preferences Utility function U(C,l) Assumptions: ⚫ More is better than less: , ⚫ Diversity is good: Falling MRS ⚫ Consumption and leisure are normal goods 7 0 UC 0 Ul
● Indifference curves D Leisure, I
Indifference Curves 8
Properties of Indifference ●●● Curves o Downward sloping: Follows from positive marginal utilities o Convex: Follows from falling marginal rate of substitution
Properties of Indifference Curves Downward sloping: Follows from positive marginal utilities Convex: Follows from falling marginal rate of substitution 9