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# PS2 - University of Minnesota Department of Economics Econ...

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University of Minnesota Department of Economics Econ 3102: Intermediate Macroeconomics Problem Set 2 Answer key 1 Problems (60 points) Exercise 1 (15 points) Consider a simple one-period, closed-economy model where the representative consumer has utility function U ( C, ‘ ) = C 1 / 2 1 / 2 and has h available hours to divide between work and leisure. The representative firm has technology given by Y = zK 1 / 3 N 2 / 3 . There is a government that sets its expenditure level at a value G 0 0. (a) Define a CE for this economy. (b) Find the CE values ( C * , ‘ * , N * , T * , Y * , w * ) given parameters h = 14, z = 1, K = 15 , 625, and G 0 = 0. Exercise 2 (15 points) Consider the same economy described in Exercise 1. (a) Set up the equivalent social planner’s problem. (b) Solve it and show that it gives the same results as those from Exercise 1, part (b). Exercise 3 (15 points) Repeat Exercise 1, part (b), but now assume that G 0 = 10. Go as far as you can into solving for the CE values. If you can find them, how different is the allocation to that of Exercise 1, part (b)? If you cannot find a way to calculate the CE values, where do you get stuck? Comment on how easy/complicated it is to

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PS2 - University of Minnesota Department of Economics Econ...

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