Consider a static (one-period), closed economy with one representative consumer, one representative firm, and a government....

Consider a static (one-period), closed economy with one representative consumer, one representative firm, and a government. The level of capital K and government expenditures G in the economy are both fixed exogenously. The government levies a lump sum tax T in order to fund its purchases, and the government budget must balance. Suppose the price of consumption is normalized to one (p = 1). The representative consumer has 24 hours of time available (h = 24), which she can use only for labor or leisure. She re- ceives labor income, profits from the firm (π), and pays lump sum taxes. The consumer’s utility function isu(c,l)=1/3 ln(c)+2/3 ln(l),andthefirm’sproductionfunctionisY =zKθN1−θ.

1. List the requirements that must be satisfied to achieve competitive equilibrium in this economy.

2.Suppose z=10,θ=1/4,K=96 and the wage is w=15 per hour of work. Solve the firm’s profit maximization problem for N∗. Compute the firm’s output Y and profit π at the optimal choice of N∗.

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Rahul Sunny answered 1 year ago

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