Macroeconomics (Fourth Edition)
4th Edition
ISBN: 9780393603767
Author: Charles I. Jones
Publisher: W. W. Norton & Company
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Chapter 12, Problem 7E
To determine
Economic reasoning of short-run model.
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Consider the following one-period model. Assume that the consumption good is produced by a linear technology: Y = zN D where Y is the output of the consumption good, z is the exogenous total factor productivity, N D is the labour hours. Government has to finance its expenditures, G, using a tax on the representative firm. The government collects t units of consumption goods from the firm for each unit of labor it employs (0 < t < 1). There is no other tax in the economy. The firm is owned by the representative consumer who is endowed with h hours of time she can allocate between work, NS and leisure, l. Preferences of the representative consumer are: U(c, l) = ln c + ln l (1) (a) Write down the definition of a competitive equilibrium for the above economy. (b) Show that the Walras’ law holds for this economy. (c) Solve for the leisure, l, the consumption, c, employment, N, wage rate, w, tax rate, τ , and output, Y in equilibrium. (d) Solve for the optimal allocation of leisure,…
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Macroeconomics (Fourth Edition)
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