and V(1 n) 0(1 n) I realize the assumption on V violates the strictly concave of the utility function, but just go with it as a simplification. (d) Explain how the income and substitution effects impact your answer. (e) Drop the assumption w is constant. Assume now that output is produced as y = Ana where A0 is constant and 0 < a < 1. Households receive labor income and dividend income D where all profits are distributed as dividend. The household's budget set is In equilibrium c=y. wn(1-T)+D≥C i. Solve the household's problem. ii. Assume there is a firm that manages the production process, hiring labor and paying out profits as dividends. Write out the firm's problem. iii. Now vary the tax parameter 7 and determine what happens to equilibrium labor, consumption and tax revenue as 7 varies. iv. Write out the equilibrium conditions. Assume the tax revenue disappears and doesn't impact the goods market or provide any additional utility to households. v. In the first part of the question, you were told to treat was fixed and deter- mine the impact of changes in 7 on the labor supply and tax revenue. In the second part of the question, you incorporated the impact of a change in the tax rate on wage rate. Explain why a prediction of the impact of an increase in the marginal tax rate based on the assumption the wage rate is constant is an example of the Lucas Critique that some variables are held constant allu functions of underlying parameters.
and V(1 n) 0(1 n) I realize the assumption on V violates the strictly concave of the utility function, but just go with it as a simplification. (d) Explain how the income and substitution effects impact your answer. (e) Drop the assumption w is constant. Assume now that output is produced as y = Ana where A0 is constant and 0 < a < 1. Households receive labor income and dividend income D where all profits are distributed as dividend. The household's budget set is In equilibrium c=y. wn(1-T)+D≥C i. Solve the household's problem. ii. Assume there is a firm that manages the production process, hiring labor and paying out profits as dividends. Write out the firm's problem. iii. Now vary the tax parameter 7 and determine what happens to equilibrium labor, consumption and tax revenue as 7 varies. iv. Write out the equilibrium conditions. Assume the tax revenue disappears and doesn't impact the goods market or provide any additional utility to households. v. In the first part of the question, you were told to treat was fixed and deter- mine the impact of changes in 7 on the labor supply and tax revenue. In the second part of the question, you incorporated the impact of a change in the tax rate on wage rate. Explain why a prediction of the impact of an increase in the marginal tax rate based on the assumption the wage rate is constant is an example of the Lucas Critique that some variables are held constant allu functions of underlying parameters.
Chapter4: Utility Maximization And Choice
Section: Chapter Questions
Problem 4.2P
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