Exercise 3. Consider the model economy where the government taxes consumption and uses the tax revenues to finance a lump-sum transfer payment to the household. The commodities are labor h and consumption c. The price of c is normalized to 1. The price of labor is the wage rate w. A household's problem is to maximize utility In cd + aln(100-h³) subject to its budget constraint, (1 +T)cª = whª + Tr_where Tr is a lump sum transfer from the government. Here the superscripts s and d indicate supply and demand A firm's problem is to maximize profits Ahª – whª The government's budget constraint is Tr = tcd. The consumption and labor markets clear which means that c = c = c and h³ = hd = h. a) Find the equilibrium for this economy; that is equilibrium (c, h, w) as a function of utility function parameter a, TFP parameter A, and tax policy parameter 7.

Exercise 3. Consider the model economy where the government taxes consumption and uses the tax revenues to finance a lump-sum transfer payment to the household. The commodities are labor h and consumption c. The price of c is normalized to 1. The price of labor is the wage rate w. A household's problem is to maximize utility In cd + aln(100-h³) subject to its budget constraint, (1 +T)cª = whª + Tr_where Tr is a lump sum transfer from the government. Here the superscripts s and d indicate supply and demand A firm's problem is to maximize profits Ahª – whª The government's budget constraint is Tr = tcd. The consumption and labor markets clear which means that c = c = c and h³ = hd = h. a) Find the equilibrium for this economy; that is equilibrium (c, h, w) as a function of utility function parameter a, TFP parameter A, and tax policy parameter 7.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter6: Demand Relationships Among Goods

Section: Chapter Questions

Problem 6.3P

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