B 1. (35 points) Consider a one-period closed economy, i.c. agents (consumers, firms and government) live for one period, consumers supply labor and demand consumption good, whereas firms supply consumption good and demand labor, and government finances an exogenous spending via lump-sum taxes. Suppose that representative con- sumer's current period exogenous income (7 - T) decreases due to recession. Analyze the effects of this change on the consumption/leisure choice of the individuals given a constant wage and tax. 2. (35 points) Suppose that a consumer can carn a higher wage for working overtime. For the first q hours the consumer works, she receives a real wage of w1, and for the hours worked more than q she receives w2, where w2 > w1- Suppose that the consumer pays no taxes and receives no non-wage income. (a) Draw the consumer's budget constraint, and show her optimal choice of consump- tion and leisure. (b) Determine what happens if the overtime wage rate w2 increases. Explain your results in terms of income and substitution effects. You must consider the case of a worker who initially works overtime and a worker who initially does not work overtime. 3. (30 points) Suppose that the government taxes employment. That is, the firm has to pay s fraction of the total wage bill to the government as tax. Analyze the effects of the tax on the firm's demand for labor and output. 9 0 R w