Ouestion 6. (4 points each) The labor market model that we studied in class is called a Classical model in the sense that all markets have been assumed to be competitive and we have assumed that no hlarket failures" exist. We studied the effects of productivity changes or tax changes in the Classical model. In this question, we explore the implication of fiscal stimulus i.e., increases in government purchases on labor, output and consumption in this Classical model. Later in the class, we will study fiscal stimulus in a Keynesian model. Suppose there is only one person again (Robinson) and his utility function is given by lnc + ln(l N) + 91nG where G is government purchases, C is consumption and N is labor (O S N < 1). Here we entertain the possibility that Robinson may value the things that the government purchases, so G shows up in the utility function. 9 governs how much Robinson values G. Suppose Robinson's budget constraint is given by C = WN T where T is the lump sum tax. Also, assume for simplicity that the government runs a balanced budget, G = T. The resource constraint in the economy is Y = C + G, i.e., consumption plus government purchases cannot exceed the amount of output produced Y. In this model, we will treat N, Y, C, as endogenous variables and the rest are exogenous. (1) Derive Robinson's labor supply curve (Express N as a function of w and T). Is labor supply increasing/decreasing in wage? (Hint: Since G is exogenous, Robinson treats it as a constant.) (2) Suppose the production function is Y = AN, and thus the wage is given by w = A (This is actually the labor demand curve.). Use this equation and labor supply curve, resource constraint and/or the balanced budget equation to solve for equilibrium labor in terms of only G , A, p. Comment on how an increase in government purchases affects labor.