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Chapter_2_Exercises_Static_GE - Econ 509 Static GE...

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Econ 509 S.L. Parente Static GE Equilibrium and Welfare Gain Exercise The commodities are labor h and consumption c. The price of c is normalized to 1. The price of labor is the wage rate w. A household’s problem is to maximize utility ) 100 ln( ln s d h c - + α subject to its budget constraint ψ τ + - s s d wh wh c , where is the tax rate on labor income and is a lump sum transfer from the government. Here the superscripts s and d indicate supply and demand A firm’s problem is to maximize profits d s wh c - , subject to the technology constraint d s Ah c . The government’s budget constraint is wh = . The consumption and labor markets clear which means that c c c d s = = and h h h d s = = . Exercise 1 : Find the equilibrium for this economy; that is equilibrium ( , , , ) c h w as a function of utility function parameter and tax policy parameter . Note set the TFP parameter A =1. Exercise 2
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Chapter_2_Exercises_Static_GE - Econ 509 Static GE...

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