Consider a 1 period economy (static problem) with consumers, government and firms. As- sume strictly increasing, twice continuously differentiable, quasiconcave utility function and strictly increasing, twice continuously differentiable, quasi-concave constant returns to scale production function. The consumer has labor income from her hourly real wage w and also receives firms' real dividends (this is her "exogenous" income, i.e., income she takes as given). The government raises revenue through real lump sum taxes t to finance real government expenditure g. a. Show graphically the equilibrium of the static problem. b. Let a decrease in government expenditures; show graphically where the new equilibrium point would be. c. Explain what happens to real taxes, to the consumer's budget constraint, to hours worked, to production, real consumption and real output.

Consider a 1 period economy (static problem) with consumers, government and firms. As- sume strictly increasing, twice continuously differentiable, quasiconcave utility function and strictly increasing, twice continuously differentiable, quasi-concave constant returns to scale production function. The consumer has labor income from her hourly real wage w and also receives firms' real dividends (this is her "exogenous" income, i.e., income she takes as given). The government raises revenue through real lump sum taxes t to finance real government expenditure g. a. Show graphically the equilibrium of the static problem. b. Let a decrease in government expenditures; show graphically where the new equilibrium point would be. c. Explain what happens to real taxes, to the consumer's budget constraint, to hours worked, to production, real consumption and real output.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter9: Production Functions

Section: Chapter Questions

Problem 9.9P

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