2 Problem 2 (40 points) Assume a two period Ramsey economy with consumers and producers. Utility function and production function are: 1 9 1 9 c- 1 1 1 U{t31,r32):1 _9 +1+pc'1_9 and Y = AK'J'L1_\"' Assume p > I]. Also assume that the interest rate is 'r'. Denote by Rk the rate of remuneration of capital and w the wage(i.e. the rate of remuneration of labor}. Assume that the government levies the following taxes: Tu, on wages, Ta on assets (savings), Tc on consumption, and 1'): on rm prots. There is no inheritance. All taxes are proportional. 1. [10 points] \"'hich of these taxes are now part of the Euler Equation? Derive the new Euler Equation. 2. [5 points] Analyze this statement: the taxes which are not part of the Euler Equation do not distort anything in the economy. 3. [5 points] Suppose you are asked by a policy maker about increasing taxes. \"'hich out of 11 , Tm TE and] or 1"} would you recommend that they increase? 1Why? (Hint: there is no \"right" answer you Will be judged on the argument you make.)