Question
You will use this model economy description throughout the homework. Consider an economy made up of a representative household, a government that spends and finances
You will use this model economy description throughout the homework.
Consider an economy made up of a representative household, a government that spends and finances it by collecting lump sum taxes. There is no trade nor investment in this economy. The price of consumption is equal to one (pc=1).
Suppose the representative household in the economy has the following utility function and marginal rate of substitution (MRS):
u(C,L) = 5ln(C) +14ln(L) which implies that the MRS L,C = 14C/5L where C is consumption and L is leisure hours of the 244 hours available.
Firms have the following technology where Y is the economys goods and services with 910 units of physical capital (K) and N being labor used with the capital share of income as 0.32 and Total Factor Productivity given as 6.5:
Y=zKaN(1-a) which implies that the marginal product of labor for this economy is as follows: MPN = (1-a) zKaN(-a).
Consider the One Period Production Economy above. Now suppose the government increases spending to 200 causing profit to be 290.9025 and wages to be 10.6703. Assume that the economy is in equilibrium.
a) How much labor would be provided and hired in this scenario?
b) What would GDP for the country be in this scenario?
c)How much consumption would take place in this scenario?
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