ECON302_Assignment3_F11 - ECON 302 Macroeconomic Theory 2...

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Page 1 of 4 Pages ECON 302 Macroeconomic Theory 2 Instructor: Sharif F. Khan Department of Economics University of Waterloo Fall 2011 Assignment 3 (Optional) Total Marks: 80 Marks Read each part of the question very carefully. Show all the steps of your calculations to get full marks, unless it is mentioned otherwise. 1. [45 Marks] Consider a closed economy with a representative consumer, a representative firm and a government. The representative consumer is endowed with h hours of time. Assume that the consumer has the preferences over the consumption good, c , and leisure, l , described by the following utility function. ( ) . ln ln , l c l c u + = She faces a market real wage rate, w , per hour. The consumer is assumed to have h hours of time available, which can be allocated between leisure time, l , and time spent working (or labour supply), denoted by s N . She receives π units of the consumption good as dividend income from the representative firm. Suppose that the government imposes a proportional income tax on the representative consumer. That is, for each w she earns on the market, she pays tw units of consumption good to the government where t is the income tax rate, and 0 < t < 1. There are no lump-sum taxes, or . 0 = T The representative firm is a perfectly competitive firm. Assume that the representative firm produces the consumption good only with labour as an input. It has the following technology to produce the consumption good: , d zN Y = where Y is the aggregate output of consumption goods produced by the firm, z is the exogenous total factor productivity and d N is the hours of labour employed by the firm. The firm faces a market real wage rate, w , per hour.
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Page 2 of 4 Pages The government purchases exogenously fixed G units of consumption goods from the firm. It fully finances this purchase with proportional income taxes collected from the
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This note was uploaded on 02/05/2012 for the course ECON 302 taught by Professor Jean-paullam during the Fall '08 term at Waterloo.

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ECON302_Assignment3_F11 - ECON 302 Macroeconomic Theory 2...

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