1.Suppose that the representative consumer's preferences can be described by:

u(C, l) =Cl.

Suppose that production technology uses only labor and is constant returns to scale:

Y = N^d. The government imposes a proportional tax on wage income at a rate of 10% and total time endowment h is equal to 1.

a.Write down the profit maximization problem for the firm. What is the equilibrium real wage?

b.What (C, l) bundle does this consumer choose? Provide a numeric answer and a graphical illustration of your answer on a well-labelled diagram.

c.What is the total government spending, G? (Hint: G is equal to the total tax revenue.)

d.Now suppose that there is a benevolent social planner who chooses (C, l) bundle to maximize representative household's utility subject to the resource constraint, i.e. PPF. Assume that amount of government expenditure for the social planner is exactly equal to the amount you calculated in part (c). Obtain an equation for PPF and plot it on the same diagram above.

e.What (C; l) bundle does the social planner choose? Provide a numeric answer and a graphical illustration of your answer on the same diagram above.

f.Briefly comment on the efficiency of the market allocation.