Suppose we assume following static model of an economy where a representative agent has a utility over consumption c and leisure 1. Assume preferences satisfy all the properties mentioned in Williamson Chapters 4. The representative consumer is endowed of one unit of time. There is also a representative firm which follows the production function give as y =zf (k, h) where k is the xed capital input and h is labor input. Suppose that the government levies a proportional tax on labor income 2' , where 0 0. The consumer has an endowment of one unit of time. The representative rm has a technology for producing consumption goods given by y = zkanl'\" , where y is output, 2 is total factor productivity (TFP), k is the xed capital input , n is the labour input and 0