NotesECN741-page10

NotesECN741-page10 - h x h l =-p 2 . Combining the FOC...

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ECN 741: Public Economics Fall 2008 h ( x 2 ,l 2 ) = 0 . Private agents solves max c,l U ( c 1 ,c 2 ,l 1 + l 2 ) subject to p 1 (1 + τ 1 ) c 1 + p 2 (1 + τ 2 ) c 2 l 1 + l 2 . Producer of good x 1 solves max x 1 ,z,l 1 p 1 x - l 1 - p 2 (1 + τ z ) z subject to f ( x 1 ,z,l 1 ) = 0 . The FOC for this problem implies f z f l = p 2 (1 + τ z ) . Producer of good x 2 solves max x 2 ,l 2 p 2 x 2 - l 2 subject to h ( x 2 ,l 2 ) = 0 . and FOC implies
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Unformatted text preview: h x h l =-p 2 . Combining the FOC condition for two sector we get h x h l (1 + z ) =-f z f l . Government budget constraint is 1 p 1 c 1 + 2 p 2 c 2 + z p 2 z = p 1 g 1 + p 2 g 2 10...
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