Question 1:

Consider the following one-period, closed-economy model. Utility function over consumption (C) and leisure (L)

U(C, L) = C^1/4L ^3/4

Total hours: H = 40

Labour hours: N^S = H - L

Government expenditure = 30

Lump-sum tax = T

Production function: Y = zN^D

Total factor productivity: z = 4

The representative consumer maximizes utility, the representative firm maximizes profit, and the government balances budget. Suppose there is an increase in total factor productivity, z, to 5. What is the income effect of this on labour supply?