Problem using Lagrange Multipliers in Utility function

constraintseconomicslagrange multiplieroptimizationutility

I am to optimize utility given the utility function
$$ u(c,l):=c-\frac{\eta}{\eta+1}(24-l)^{\frac{\eta+1}{\eta}},$$

where $c$ represents consumption and $l$ represents leisure. The budget constraint given: $pc+wl=24w$; $p$ represents the price of consumption and $w$ represents hourly wage. I have found the optimal amount of leisure, but I can’t find the optimal amount of consumption for the life of me. I have found the optimal amount of leisure, $l^*$, as follows:

I have written it as a Lagrangian maximization problem:
$$ L(c,l,\lambda)=c-\frac{\eta}{\eta+1}(24-l)^{(\eta+1)/\eta} – \lambda(pc+wl-24w) $$

and found the following:
$$ \frac{\partial (U)}{\partial(l)}=-\lambda w+ (24-l)^{1/\eta}=0 $$

Solving for $\lambda$:
$$ \lambda = \frac{(24-l)^{1/\eta}}{w} $$
and
$$ \frac{\partial (U)}{\partial(c)}=-\lambda p+1=0 $$

Solving for $\lambda$:
$$ \lambda = 1/p$$

I then set $\lambda$ equal to $\lambda$ and solved the equation for $l$:
$$ \frac{(24-l)^{1/\eta}}{w} = 1/p $$
$$ l^*= 24-\left(\frac{w}{p}\right)^{\eta} $$

I have concluded that this is the optimal amount of leisure, however, I can’t find the optimal amount of consumption, as $c$ of course vanishes unless you find the partial derivative with respect to $\lambda$; this, however, of course doesn’t yield an equation containing $\lambda$, so I can’t isolate $\lambda$ and find $c^*$ how I found $l^*$. Any help would be much appreciated 🙂

Best Answer

So far so good. Next you make the derivative of $\mathcal L(c,l,\lambda)$ w.r.t $\lambda$, which is just the constraint.

$$\frac{\partial\mathcal L(c,l,\lambda)}{\partial \lambda}=24w-pc-wl=0$$

In combination with $l^*= 24-\left(\frac{w}{p}\right)^{\eta}$ we obtain

$$24w-pc-w\cdot \left(24-\left(\frac{w}{p}\right)^{\eta} \right)=0$$

It remains to solve the equation for $c$. I don´t think that you need the next steps. So I hide them and you can compare them with your own steps at the end.

$$-pc+w\cdot \left(\frac{w}{p}\right)^{\eta} =0$$ $$c^*=\frac{w}p\cdot \left(\frac{w}{p}\right)^{\eta} $$ $$c^*= \left(\frac{w}{p}\right)^{\eta+1} $$

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