Question
Consider an economy in which the representative consumer preferences are described by U(C, l) = C^2/5 l^3/5 . The total number of hours available to
Consider an economy in which the representative consumer preferences are described by U(C, l) = C^2/5 l^3/5 . The total number of hours available to the representative consumer is h = 1, and the market real wage is w. The representative firm produces the final consumption good using the technology function Y = zN where N is the labour, and z = 3. Assume the government sets the level of its spending to G = 0.75 which has to be financed through a proportional tax t.
1. Find the Pareto optimal allocation (lP O, NP O, YP O, CP O) by solving the social planner's problem.
2. Find the competitive equilibrium allocation (tCE, lCE, NCE, YCE, CCE).
3. What do you conclude?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started