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Unformatted text preview: University of Minnesota Department of Economics Econ 3102: Intermediate Macroeconomics Problem Set 3 Exercise 1 (30 points) Consider a two-period economy where we have a representative consumer, a representative firm, and a gov- ernment. The representative consumer derives utility from a consumption and leisure in period 1 (denoted by C 1 , ‘ 1 , respectively), and consumption and leisure in period 2 ( C 2 , ‘ 2 ), according to the time-separable utility function U ( C 1 ,‘ 1 )+ U ( C 2 ,‘ 2 ). The consumer’s time endowment consists of h hours each period, which she can devote either to work or leisure. If she decides to work, she supplies labor to the representative firm and earns wage rates w 1 (for period 1 labor) and w 2 (for period 2 labor) per hour worked. She also enjoys a dividend income π t and has to pay a lump-sum tax to the government of size T t , where t = 1 , 2....
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This note was uploaded on 02/07/2011 for the course ECON 3102 taught by Professor Mingyi during the Spring '08 term at Minnesota.
- Spring '08