1. The government wishes to stimulate the economy and considers the following tax policy change: firms...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
1. The government wishes to stimulate the economy and considers the following tax policy change: firms would receive a subsidy 7 in the current period for each unit of output produced. Current profits for firm would be = (1 + r)y - wWN - I. Suppose that the government proposes to fund this subsidy using a lump-sum tax T on consumers today. Recall that the firm's future profits are ' = y' - w'N' + (1 - d)K' where output in both periods is produced with the following log function, 1+r y = z(Ink + InN) where capital tomorrow is given by the accumulation equation K' (1-d)K+I with depreciation rate d. The firm's problem today is to choose N and K' to maximize the value V = n + where r is the real interest rate. The consumer's utility is given by u(c, l) = log(c) + y log(1). This consumer maximizes utility over two periods (current and future periods) and discount the future using the weight on the future utility. Thus, the consumer optimally chooses consumption c and leisure l in current and future periods, given the fixed level of wages in both periods, w and w'. The total amount of time is h, and labor supply NS is defined as h - 1. The consumer is the shareholder of the firm, meaning that she receives flows of dividends, + She pays a lump-sum tax T in current period. 1+r Assume that the government does not need to pay for its expenditure, implying that G = G' = 0. a. Derive the firm's first order conditions with respect to labor today N and capital tomorrow K'. b. What is the effect of the proposed policy on the firm's labor demand and investment today? c. Write down the government budget constraint with the proposal to fund the subsidy. d. Derive the consumer's first order conditions with respect to consumption c and leisure I in the current period. e. What is the effect of the proposed policy on consumers' choice of consumption today and labor supply today? (Assume that changes in dividends are negligible.) f. Verify that output supply curve is upward sloping in the real interest rate r. See how optimal labor supply Ns and output y in the current period change in response to the rise in r. (Assume that the equilibrium effects on real wages are not large enough to consider.) g. Verify that output demand curve is downward sloping in the real interest rate r. See how optimal consumption C and investment I in the current period change in response to the rise in r. (Assume that the equilibrium effects on real wages are not large enough to consider.) h. Using the graph of the labor market and good demand market, analyze the effect of the proposed policy on the macroeconomy in the current period. What happens to real wage, employment, real interest rate, output? 1. The government wishes to stimulate the economy and considers the following tax policy change: firms would receive a subsidy 7 in the current period for each unit of output produced. Current profits for firm would be = (1 + r)y - wWN - I. Suppose that the government proposes to fund this subsidy using a lump-sum tax T on consumers today. Recall that the firm's future profits are ' = y' - w'N' + (1 - d)K' where output in both periods is produced with the following log function, 1+r y = z(Ink + InN) where capital tomorrow is given by the accumulation equation K' (1-d)K+I with depreciation rate d. The firm's problem today is to choose N and K' to maximize the value V = n + where r is the real interest rate. The consumer's utility is given by u(c, l) = log(c) + y log(1). This consumer maximizes utility over two periods (current and future periods) and discount the future using the weight on the future utility. Thus, the consumer optimally chooses consumption c and leisure l in current and future periods, given the fixed level of wages in both periods, w and w'. The total amount of time is h, and labor supply NS is defined as h - 1. The consumer is the shareholder of the firm, meaning that she receives flows of dividends, + She pays a lump-sum tax T in current period. 1+r Assume that the government does not need to pay for its expenditure, implying that G = G' = 0. a. Derive the firm's first order conditions with respect to labor today N and capital tomorrow K'. b. What is the effect of the proposed policy on the firm's labor demand and investment today? c. Write down the government budget constraint with the proposal to fund the subsidy. d. Derive the consumer's first order conditions with respect to consumption c and leisure I in the current period. e. What is the effect of the proposed policy on consumers' choice of consumption today and labor supply today? (Assume that changes in dividends are negligible.) f. Verify that output supply curve is upward sloping in the real interest rate r. See how optimal labor supply Ns and output y in the current period change in response to the rise in r. (Assume that the equilibrium effects on real wages are not large enough to consider.) g. Verify that output demand curve is downward sloping in the real interest rate r. See how optimal consumption C and investment I in the current period change in response to the rise in r. (Assume that the equilibrium effects on real wages are not large enough to consider.) h. Using the graph of the labor market and good demand market, analyze the effect of the proposed policy on the macroeconomy in the current period. What happens to real wage, employment, real interest rate, output?
Expert Answer:
Answer rating: 100% (QA)
From the provided information we can answer question a Derive the firms first order conditions with respect to labor today N and capital tomorrow K Th... View the full answer
Related Book For
Posted Date:
Students also viewed these economics questions
-
The government wishes to bring about an increase in investment expenditures, and is considering two tax policies that policymakers think could bring this about. Under the first tax policy, firms...
-
KYC's stock price can go up by 15 percent every year, or down by 10 percent. Both outcomes are equally likely. The risk free rate is 5 percent, and the current stock price of KYC is 100. (a) Price a...
-
Citizens of Zephyronia consume only two goods and do not trade with the outside world. There is a fixed supply of labor in Zephyronia, which can be applied to production of either good. Good 1 is...
-
In Exercises find the derivative of the algebraic function. f(x) = (2x + 5x)(x 3)(x + 2)
-
What was the source of the problem here?
-
For the duct sizes in the previous exercise, which duct section uses the least material? Data From Previous Exercise Determine the perimeter length (in mm) and aspect ratio of the following ducts: a....
-
The wreck of the S.S. Central America waited 130 years at the bottom of the ocean for someone to come along and claim its trove of gold. Thomas G. Thompson, funded by a multitude of investors, was...
-
Refer to the financial statements of Urban Outfitters given in Appendix C at the end of this book. Required: 1. Does Urban Outfitters use the direct or indirect method to report cash flows from...
-
Please create the model of a library database. Describe the one-to-many relationships in the library database What is the name of the DDL file you exported in step 2.3 Generate DDL ? Create a...
-
For R, partition the data sets into 60% training and 40% validation and implement the 10-fold cross-validation. Use the statement set. seed(1) to specify the random seed for data partitioning and...
-
During the year ended 31 December 20X1. Bougs Co built an extension to its head office. Associated costs are as follows: Sm Land acquisition 17 Fees for environmental certifications and building...
-
Jill Price has an incredible memory. Since she was 15 years old, she can remember everything that she has done and every t.v. show she has watched. What type of memory is special for Jill Price?
-
How might definitions of well-being differ across and within cultures? Why is this important to consider in a clinical psychology or health psychology context?
-
What theories have been used in peer-reviewed research when investigating emotion-based persuasive messages? What has peer-reviewed research revealed about the implications of emotion-based...
-
What is the difference between the fair market value of employer securities at distribution and their cost or other basis to the plan?
-
What statement regarding tuition fees is correct? The tuition tax credit includes the cost of books for students who receive in-class instruction. Full-time students at recognized post-secondary...
-
A boy uses a string to swing a 2.2 kg stone around his head. Thestring is 1.5 m long, and can bear a maximum tension of 1012 N.What is the maximum speed at which the boy can swing the stonewithout...
-
Dan and Diana file a joint return. Dan earned $31,000 during the year before losing his job. Diana received Social Security benefits of $5,000. a. Determine the taxable portion of the Social Security...
-
Recall that leisure time in our model of the representative consumer is intended to capture any time spent not working in the market, including production at home such as yard work and caring for...
-
Suppose that the nominal interest rate is zero, that is, R = 0. (a) What is the equilibrium quantity of credit card balances? (b) In what sense does the economy run more efficiently with R = 0 than...
-
Suppose that there is a credit market imperfection due to asymmetric information. In the economy, a fraction b of consumers consists of lenders, who each receive an endowment of y units of the...
-
The purchasing officer for The Majestic Emporium has prepared a purchases budget for the financial year ending 31 March 2020, based on the following data. The cost of sales is 65% of sales, and the...
-
Greyt Dog Beds Ltd manufactures dog beds specifically designed for greyhounds and whippets. The company purchases all the required materials from external suppliers and designs and assembles the...
-
Ketton Ltd is in the process of preparing direct labour and factory overhead budgets for the year ending 30 June 2020. Relevant data are set out below. Required (a) Prepare the direct labour budget...
Study smarter with the SolutionInn App