Question
In: Economics
Consider a perfect competitive economy with a single good, X, and two factors of production: labour,...
Consider a perfect competitive economy with a single good, X, and two factors of production: labour, L, and capital, K. The production function of a representative firm is: X = K^(1/2) L^(1/2) . Production factors and the firm are owned by a single consumer. Assume that labour supply is infinitely inelastic at the quantity L= 16, while the amount of capital is infinitely elastic at the price r=4 (this is the case of a small open economy). Take good X as numerarire, so that Px = 1.
a) Find the level of employment, the wage rate, the price of capital, and national income in general equilibrium
b) Assume that an ad-valorem tax on capital tk =0.2 is established. Find the level of employment, the wage rate, the price of capital, as well as the tax revenue in the new general equilibrium. Who bears the tax burden?
c) Suppose that instead of a tax on capital the government imposes an ad-valorem labour tax that collects the same tax revenue as in (b). Find the new equilibrium (employment and factor prices). Do workers prefer the capital tax rather than the labour tax?
Solutions
Rahul Sunny answered 7 months agoRelated Solutions
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