The production function is Y = 10H. Household’s utility function is ln(c + 0.4G) + ln(l) with labor endowment, h¯ = 1. Suppose that government spending G = 0.1 and government collects lump-sum tax T to finance its spending. The government budget constraint is T = G. The household’s budget constraint is, c = 10h − T (a) (1 point) What is the equilibrium wage for this economy? (b) (4 points) Suppose the household’s time endowment is h¯ = 1. Find the household’s labor supply. (Notice the equilibrium condition T = G). (c) (5 points) Suppose that government spending increases, i.e., G = 0.2. What are household’s labor supply and consumption in this case? Do they increase or decrease? (d) (5 points) Compare output (Y = 10H) in part (a) and (b). Why do you think output change? Explain your answer
The production function is Y = 10H. Household’s utility function isln(c + 0.4G) + ln(l)with labor
endowment, h¯ = 1. Suppose that government spending G = 0.1 and
government collects lump-sum tax T to finance its spending. The government budget
constraint is T = G. The household’s budget constraint is,
c = 10h − T
(a) (1 point) What is the equilibrium wage for this economy?
(b) (4 points) Suppose the household’s time endowment is h¯ = 1. Find the household’s
labor supply. (Notice the equilibrium condition T = G).
(c) (5 points) Suppose that government spending increases, i.e., G = 0.2. What
are household’s labor supply and consumption in this case? Do they increase or
decrease?
(d) (5 points) Compare output (Y = 10H) in part (a) and (b). Why do you think
output change? Explain your answer
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