Economic environment common to both questions Consider a two-period production economy consisting of consumers, rms, and a government. In the current period the consumer allocates total time a between leisure (E) and work (N5). Working earns the consumer a real wage as. In addition the consumer consumes goods C, pays lump-sum taxes T to the government, and receives dividend income from the rm IT. The same is true in the future period (denote all future variables with a prime). The market real interest rate is r. The objective of the consumer is to maximize utility from consumption and leisure over the two periods. The rm produces output in the current period (Y) according to the constant returns to scale production function Y = zF(K,N), where z and K are current TFP and capital stock respectively, which are exogenous. The same production function with primes holds in the future period. The representative rm chooses labour in each period (N,N') as well as investment (I), which determines future capital (capital depreciates at rate 5