Question

Question 1. One period macroeconomic model
We consider an economy closed to a period populated by consumers and produce. The representative consumer chooses the quantity of leisure, let of consumption, as its utility under budget constraint. The representative producer chooses the labor factor that maximizes his profile Preferences satisfy the same properties as in the standard consumer model Similarly, the production function, Y = F(K.N), where k is the capital stock and the quantum labor factor obeys the properties than those of the standard model: in particular, the marginal product of labor is strictly decreasing compared to Net strictly increasing compared to K. Moreover, F(0,N) = F(K,0) = 0. Consumers and producers exchange labor for the consumer good in the labor market; consumers own the businesses and receive all of the profits. It is assumed that the government does not intervene and that public expenditure is zero.

1)Within the framework of this macroeconomic model, define a competitive equilibrium.
2) From the definition of a competitive equilibrium, construct the frontier of production possibilities associated with the choice between leisure and consumption. Explain your approach Graphically represent the quantity of consumption and leisure at equilibrium
3) What is the effect of a fall in the stock of capital, K?Using a graph, Mustrize the effect of this change on the competitive equilibrium. Interpret the result by explaining the mechanism at work

Answer 1

1. A competitive equilibrium is a set of endogenous variable(C,N^s , N^d ,N^d ,T) as an endogenous real wage rate(W) .

B.

C. Due to fall in capital stock ppf moves inward.

Please refer below image for diagram and effects.