1. Consider the following static model. The consumer has preferences such that he always sets his consumption equal to è, where è is exogenously fixed. The consumer has h units of time that he can allocate between working hours (NS) and leisure (1). The wage per hour is w. The representative firm has a technology for producing consumption goods, given by y=zNd where z is the total factor productivity and Nd is the labor input. Denote the profit of the firm as 7. The firm belongs to the representative consumer. The government imposes proportional tax 7 (set exogenously) on the labor income of the representative consumer. The government spends the tax revenue to give lump-sum subsidy B to the representative consumer. 1). Write down the consumer's budget constraint. 2). Solve consumer's optimization problem. 3). Write down the firm's optimization problem and find î and w.
1. Consider the following static model. The consumer has preferences such that he always sets his consumption equal to è, where è is exogenously fixed. The consumer has h units of time that he can allocate between working hours (NS) and leisure (1). The wage per hour is w. The representative firm has a technology for producing consumption goods, given by y=zNd where z is the total factor productivity and Nd is the labor input. Denote the profit of the firm as 7. The firm belongs to the representative consumer. The government imposes proportional tax 7 (set exogenously) on the labor income of the representative consumer. The government spends the tax revenue to give lump-sum subsidy B to the representative consumer. 1). Write down the consumer's budget constraint. 2). Solve consumer's optimization problem. 3). Write down the firm's optimization problem and find î and w.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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