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Unformatted text preview: Answer Key Take-Home Midterm EVEN-EVEN-EVEN 1 Answer Key Midterm EVEN-EVEN-EVEN This exam is take-home, open-book, open-notes. You may consult any published source (cite your references). Other people are closed. The exam you turn in should be your own personal work. Do not discuss with classmates, friends, professors (except with Prof. Starr or Ms. Fried — who promise to be clueless), until the examination is collected. 1 Consider the general competitive equilibrium of a production economy with redistributive taxation of income from endowment. Half of each household’s income from endowment (based on actual endowment, not net sales) is taxed away. The proceeds of the tax are then distributed equally to all households. We then have, M i ( p ) = p · ( . 5 r i ) + summationdisplay j ∈ F α ij p · y j + T, where T is the transfer of tax revenues to the household, T = (1 / # H ) summationdisplay h ∈ H p · ( . 5 r h ) . Assume that Walras’s Law holds as an equality. 1. Define a competitive equilibrium in this economy. 2. Does a competitive equilibrium generally exist in this economy? Explain. 1.1 Suggested Answer The model of this question is merely the usual model of Chapters 11 -18 with a redistribution of endowment. The rest follows as before. 1. The usual definition of competitive equilibrium applies, modified to ac- commodate the rearrangement of household income. A competitive equi- librium consists of prices p * ∈ P and allocation D i ( p * ) ,S j ( p * ) so that ∑ i ∈ H D i ( p * ) ≤ ∑ j ∈ F S j ( p...
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