Question 40Using the model of public good, suppose that output is produced, as in the simplified model with proportional taxation, with labour andz = 1.However, there is lump-sum taxation, and the PPF is given byY=h-l-G.

Now the consumer has preferences over three goods: private goodsC, public goodsG, and leisurel.

Assume thatCandlare perfect complements for the consumer, that is, the consumer always wants to consumeCandlin fixed proportions, withC=dlandd>0.

c) Suppose that public goods and private goods are perfect complements. In this case, the representative consumer always wishes to consume private consumption goods and public goods in fixed proportions, orC=aG, witha> 0.

Here, the consumer faces a taxT = G, and the wage isw=1.

Using the production possibilities frontier, it is optimal for the consumer to choose_______ and ______.

Show your solution (with allthe steps)

a) C=aG and l= (aG/d)

b) C=aG and l= (dG/a)

c) C=aG and l= (aG/1+d)

d) none of the above