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25) Consider the following one-period, closed-economy model. Utility function over consumption (C) and leisure (L) U(C,L)...

25) Consider the following one-period, closed-economy model. Utility function over consumption (C) and leisure (L) U(C,L) = C 1/2 L 1/2 Total hours: H = 40 Labour hours: N S = H – L Government expenditure = 30 Lump-sum tax = T Production function: Y = zN D Total factor productivity: z = 2 The representative consumer maximizes utility, the representative firm maximizes profit, and the government balances budget. Suppose there is an increase in total factor productivity, z, to 3. What are the substitution and income effects of this price change on C, L, and N S ?

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Rahul Sunny answered 1 year ago
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