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Unformatted text preview: Econ 3102: Intermediate Macroeconomics Homework #2 Answer Key 1 Problems (55 points) Exercise 1 (20 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 &rm has technology given by Y = zK 1 = 3 N 2 = 3 . There is a government that sets its expenditure level at a value G & . (a) Carefully de&ne a CE for this economy. (b) Find the CE allocation ( C & ;‘ & ;N & ;T & ;& & ;w & ) given parameters & h = 1 , z = 1 , K = 8 , and G = 0 . Verify that the global maximum is, in fact, an interior one. Answer: You can do this in a variety of ways; most likely you& ll get full credit unless you are not careful enough to get the de¡nition pretty much correct. (a) Given ¡scal policy G & , a CE in this economy is a household allocation ( C & ;‘ & ) , a ¡rm&s allocation N & , pro¡ts & & , lump-sum taxes T & , and prices w & such that: ¡ Given prices, pro¡ts, and taxes, the household allocation solves the representative consumer&s problem: max C;‘ C 1 = 2 ‘ 1 = 2 s.t....
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