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Midterm

# midterm 2011 answers

4 Pages
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School
Western University
Department
Economics
Course
Economics 2152A/B
Professor
Prof
Semester
Fall

Description
Midterm 2 form 2011: INCOMPLETE solutions Question 1. Some answers (b). the PPF in this economy is given by: C = zK (h ▯ l) Question 2. Some answers (a). The social planner (SP) solves maxC 0:l 0:5 OR maxC 0:l 0:5 subject to: subject to: C = zN ▯ G C = z (h ▯ l) ▯ G N + l = h (b). Solving the problem in part (a) gives the following answers: l = 45 N = h ▯ l = 100 ▯ 45 = 55 C = 2l = 2 ▯ 45 = 90 Y = 2N = 110 1 Question 3. Some answers (a). GDP according to the income approach equals after-tax labor income plus prots plus taxes. S after-tax labor income= (1 ▯ t)wN ▯ D a D prots = z N ▯ wN taxes = twN S In equilibrium N = N . Moreover, adding up the three components yields: a a GDP = (1 ▯ t)wN + z (N) ▯ wN + twN ) GDP = z (N) Alternatively, GDP according to the income approach can be written as: GDP = before-tax labor income + prots S ▯ ▯ D▯a D▯ a a = wN + z N ▯ wN = wN + [z (N) ▯ wN] = z (N) (b). A competitive equilibrium in this model is a set of endogenous variables ▯ C;l;N ;N ;▯;w;Y;T such that given exogenous variables/parameters fz;a;b;t;h;Gg the following are satised: ▯ Given the wage w; and dividend income ▯; and the tax rate t; the consumer chooses S C;l and N to maximize utility subject to constraints: maxlnC + b ▯ l C;l;N subject to: C = (1 ▯ t)wN + ▯ N + l = h ▯ Given the wage w; and exogenous variables z and a, the rm chooseto maximize prots: ▯ D▯a D madz N ▯ wN N ▯ The government balaces its budget: government expenditures equal to revenues from S taxation G = T = twN : D S ▯ The labor markets clears (is in equilibriuN):= N = N ▯ ▯ ▯ The goods market clears (is in equilibriuY = z N D a = C + G 2 (c). Consumers optimal bundle satises: MRS l;C = (1 ▯ ▯) ▯ w b ▯ C
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