Question

Which utility function for the representative consumer best describes a​ one-period model in which government spending...

Which utility function for the representative consumer best describes a​ one-period model in which government spending is not​ wasteful?

A.

U(C,L)=ln(C+0.2•G) +ln(L)

B.

There is no such utility function. In the​ one-period model government spending is always wasteful.

C.

U(C,L)=ln(C) + 0.5•L

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Homework Answers

Answer #1

(A) is the answer.

Let's take B first: G is spending by govt. for the general public, it is not an investment that will come in the future with a return. G is spent on the public to provide a public good in the current year only. Thus, 'B' is wrong. G is not always wasteful.

(C) In this type of utility function, the general public does not gain any utility from G so adding G will decrease L only. Thus, in this case, G is wasteful. L is a loanable fund most probably.

(A) In this type of utility function, G is explicitly there. Public benefits from G also. As it is in log function so G will add more utility only. Thus, G is not wasteful here.

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