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Please help me with below question Assume that output (Y) in the economy is given by a Cobb-Douglas production function, Y = zKaN1-a where z
Please help me with below question
Assume that output (Y) in the economy is given by a Cobb-Douglas production function, Y = zKaN1-a where z represents total factor productivity, K is the fixed capital stock, and N is labor. Utility is given by U = In(C) + blnl, b > 0 where C is consumption, and 1 denotes leisure. Government collects taxes by taxing the firm's revenue at a flat rate of t. (After-tax revenue for the firm is (1 - t) Y). The government uses the tax to fund its expenditure G = tY, and consumers do not value G. Assume that initially G = tY = G1(1) Draw a graph of labor market equilibrium and show the effect of increasing government expenditure G = tY = 62 > G1, assuming that the substitution effect of tax increase dominates the income effect. Denote the old labor supply and demand curves using NS, N, and the new labor supply and demand curves using NS' and N'. Mark the original equilibrium with W1, N1 and the new equilibrium with wz, N2. What is the effect on equilibrium wages and employment (note that there may be ambiguous effect on one variable)? (20 points)Step by Step Solution
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