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3. One-Period General Equilibrium Model with a Labor Income Tax There is a representative household in a economy with preference of u(c, h) = log
3. One-Period General Equilibrium Model with a Labor Income Tax There is a representative household in a economy with preference of u(c, h) = log c + 2 log(1 h). They choose how many they will consume and how many hours they will work. In addition to that, there is a representative firm maximizing their profit with a production function f(h) = zy zVh. There is a labor income tax of 20% levied by the government. Assume 2. Government runs a balance budget and does nothing with the tax revenue. 2= (a) Write down the budget constraint (1 pts) (b) Define a Competitive Equilibrium of this Economy (2 pts) (c) Find Competitive Equilibrium (2 pts) (d) Now, suppose the government raise tax on labor income. New labor tax is 40%. Find this new Competitive Equilib- rium (2 pts) (e) Is your answer from (c) is Pareto Efficient? If so, argue it is, and if not, refute it. (2 pts) 3. One-Period General Equilibrium Model with a Labor Income Tax There is a representative household in a economy with preference of u(c, h) = log c + 2 log(1 h). They choose how many they will consume and how many hours they will work. In addition to that, there is a representative firm maximizing their profit with a production function f(h) = zy zVh. There is a labor income tax of 20% levied by the government. Assume 2. Government runs a balance budget and does nothing with the tax revenue. 2= (a) Write down the budget constraint (1 pts) (b) Define a Competitive Equilibrium of this Economy (2 pts) (c) Find Competitive Equilibrium (2 pts) (d) Now, suppose the government raise tax on labor income. New labor tax is 40%. Find this new Competitive Equilib- rium (2 pts) (e) Is your answer from (c) is Pareto Efficient? If so, argue it is, and if not, refute it. (2 pts)
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