Question

How Does the Representative Consumer Respond to a Change in Real Dividends or Taxes​

Answer 1

analysis, logical analysis, and economic intuition, but in no case do solutions need to ... The lifetime utility function of the representative consumer is ... (10 points) Suppose that both the utility functions and pre-tax real wages.

Answer 2

Answer:

How Does the Representative Consumer Respond to a Change in Real Dividends or Taxes

If we think about the indifference curves in a slightly different way, we see that MRS describes marginal benefit. Since MRS represents the maximum amount of y we are willing to give up in exchange for one unit of x, it also represents how much value our consumer places on x in terms of y.

This means the indifference curve tells us the marginal benefit of good x in terms of good y, and the budget line tells us the marginal cost of good x in terms of good y. As discussed in Topic 1, using marginal analysis, our consumer will continue to purchase more of a good until the marginal benefit is equal to the marginal cost. This means

if MRS > Px/Py, the consumer will consume more x and less y.

If MRS < Px/Py, the consumer will consume less x and more y.

If MRS = Px/Py, the consumer will not change their consumption.