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Unformatted text preview: Answer Key Take-Home Midterm ODD-ODD-ODD 1 Answer Key Midterm ODD-ODD-ODD 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 corporate income taxation. In addition to the prices of goods p P , there is a (scalar) corporate tax rate , 1 > > 0. Proceeds of the tax are then distributed to households as a lump sum. Household income then is M i ( p ) = p r i + bracketleftBig j F ij (1- ) p S j ( p ) bracketrightBig + T, where T is the transfer of tax revenues to the household. The transfer to the typical household is T = 1 # H j F ( p S j ( p )) . The household budget constraint is p D i ( p ) M i ( p ) . Assume the household con- sumption sets are the nonnegative quadrant, R N + and that household endowments are r i greatermuch 0, (endowments are strictly positive in all goods). 1. The first part of the (Weak) Walras Law can be stated as p Z ( p ) = p i H D i ( p )- p j F S j ( p )- p i H r i . Show that this part of the (Weak) Walras Law is fulfilled. You may assume that the rest of the (Weak) Walras Law is fulfilled as well. 2. Theorem 18.1 is proved in a model without taxation. Does there exist a com- petitive equilibrium in the economy with corporate income taxation? You may assume P.I - P.VI, C.I-C.VI(SC), C.VII. Explain....
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- Fall '08