ECON101 Study Guide - Midterm Guide: Fundamental Theorems Of Welfare Economics, Budget Constraint, Utility

• School: University of Waterloo
• Department: Economics
• Course: ECON101
• Professor: Mikko Packalen

Document Summary

Consider an economy with two individuals, agent 1 and agent 2, as well as government. The two agents value consumption goods and leisure. The preferences of agent 1 are captured by the utility function. U (c1; l1) = c1l1; where c1 denotes consumption of agent 1 and l1 denotes leisure of agent 1. Similarly, the preferences of agent 2 are captured by the utility function. U (c2; l2) = c2l2; where c2 denotes consumption of agent 2 and l2 denotes leisure of agent 2. Each agent allocates their time between leisure and education (for simplicity, we do not model the decision about how much to work after receiving an education). L1 + e1 = 100; where e1 denotes the level of education of agent 1. Similarly, the resource constraint of agent 2 is where e2 denotes the level of education of agent 2.