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Question: consider a representative consumer who has preferences over an aggregate...

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Consider a representative consumer who has preferences over an aggregate consumption good c and leisure l. Her preferences are described by the utility function: U(c,l) = ln(c) + ln(l) The consumer has a time endowment of h hours which can be used to work at the market or enjoyed as leisure. The real wage rate is w per hour. The worker pays a proportional wage tax of rate t, so the worker’s after-tax wage is (1−t)w. The consumer also has dividend income of π. (Note that there is no lump-sum tax here.) (a) Set up the consumer’s utility maximization problem. (b) Analyze what would happen to consumption and leisure if the tax rate t increased: (a) show the effect of an increase in t on a graph. (b) Explain the economic intuitions for your results

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