Economics Government spending in one-period closed-economy model Assume a one-period closed-economy model with Consumer, Firm and Government. Consumer's utility maxi- mization problem over consumption c and leisurel is given as: max U (c,1) subject to budget constraint = wh - 1] + -T And firm's profit maximization problem is given as max T = zN" – we where N = h - 1. Government runs a balanced budget G=T Q1 Characterize graphically the competitive equilibrium of this economy. In particular draw the indifference curve, and production possibilities frontier onto {c,l}- space. Show where the equilibrium is. Q2 Characterize graphically the equilibrium effects of a positive government spending shock (an increase in G) Q3 Assume a natural logarithmic utility function U(c,l) = In c +a lnl where a > 0. Solve the equilibrium of this economy analytically. What is the response of c to an increase in G? (hint: take partial derivative)

Economics Government spending in one-period closed-economy model Assume a one-period closed-economy model with Consumer, Firm and Government. Consumer's utility maxi- mization problem over consumption c and leisurel is given as: max U (c,1) subject to budget constraint = wh - 1] + -T And firm's profit maximization problem is given as max T = zN" – we where N = h - 1. Government runs a balanced budget G=T Q1 Characterize graphically the competitive equilibrium of this economy. In particular draw the indifference curve, and production possibilities frontier onto {c,l}- space. Show where the equilibrium is. Q2 Characterize graphically the equilibrium effects of a positive government spending shock (an increase in G) Q3 Assume a natural logarithmic utility function U(c,l) = In c +a lnl where a > 0. Solve the equilibrium of this economy analytically. What is the response of c to an increase in G? (hint: take partial derivative)

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter4: Utility Maximization And Choice

Section: Chapter Questions

Problem 4.14P

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