Consider a 1 period economy (static problem) with consumers, government and firms. As- sume strictly increasing, twice continuously differentiable, quasiconcave utility function and strictly increasing, twice continuously differentiable, quasi-concave constant returns to scale production function. The consumer has labor income from her hourly real wage w and also receives firms' real dividends (this is her "exogenous" income, i.e., income she takes as given). The government raises revenue through real lump sum taxes t to finance real government expenditure g. a. Show graphically the equilibrium of the static problem. b. Let a decrease in government expenditures; show graphically where the new equilibrium point would be. c. Explain what happens to real taxes, to the consumer's budget constraint, to hours worked, to production, real consumption and real output.

Consider a 1 period economy (static problem) with consumers, government and firms. As- sume strictly increasing, twice continuously differentiable, quasiconcave utility function and strictly increasing, twice continuously differentiable, quasi-concave constant returns to scale production function. The consumer has labor income from her hourly real wage w and also receives firms' real dividends (this is her "exogenous" income, i.e., income she takes as given). The government raises revenue through real lump sum taxes t to finance real government expenditure g. a. Show graphically the equilibrium of the static problem. b. Let a decrease in government expenditures; show graphically where the new equilibrium point would be. c. Explain what happens to real taxes, to the consumer's budget constraint, to hours worked, to production, real consumption and real output.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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