Consider an economy in which the representative consumer preferences are described by U(C, l) = 2C^(1/2)...

Consider an economy in which the representative consumer preferences are described by U(C, l) = 2C^(1/2) + 3l. The total number of hours available to the representative consumer is h = 1, and the market real wage is w. The representative firm produces the final consumption good using the technology function Y = N 1/2 , where N is the labour. Additionally, assume that there is no government in the economy, that is G=0.

1. Describe the relationship between MRSl/C, and MPN at the equilibrium. [05 points]

2. Solve for the equilibrium N? by combining the equilibrium condition stated in Question 1 and the income-expenditure identity C + G = Y = N1/2 . [25 points] Hint: Use the identity C = N1/2 to write both MRSl/C and MPN as functions of N and solve the equation relating both.

3. What are the equilibrium values of w ? , Y ? , and π ? . [10 points]

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Expert Solution

Rahul Sunny answered 8 months ago

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