2. Consider the labor leisure decision with utility of In(c)+ aln(1). This utility function is characterized by an elasticity of substitution equal to one. a. What observation leads us to use this utility function? In answering this question, be sure to both list this observation and explain how it relates to the unit elasticity of substitution property. b. Explain why this utility function leads to the following claim: "To predict the effect of a change in the tax rate on work hours, one needs to know how the tax revenues are spent." In your explanation, you must demonstrate with the indifference curve/budget constraint diagram(s) two cases: one where the use of the tax revenues has no effect on the equilibrium work hours and another use of tax revenues where it does affect equilibrium work hours.

2. Consider the labor leisure decision with utility of In(c)+ aln(1). This utility function is characterized by an elasticity of substitution equal to one. a. What observation leads us to use this utility function? In answering this question, be sure to both list this observation and explain how it relates to the unit elasticity of substitution property. b. Explain why this utility function leads to the following claim: "To predict the effect of a change in the tax rate on work hours, one needs to know how the tax revenues are spent." In your explanation, you must demonstrate with the indifference curve/budget constraint diagram(s) two cases: one where the use of the tax revenues has no effect on the equilibrium work hours and another use of tax revenues where it does affect equilibrium work hours.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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