Question: Suppose that the substitution effect of an increase in the
Suppose that the substitution effect of an increase in the real wage is always larger than the income effect for the representative consumer. Also assume that the economy is always in the low-tax-rate equilibrium on the good side of the Laffer curve. Determine the effects of an increase in total factor productivity, z, on the Laffer curve, on the equilibrium tax rate, and on consumption, leisure, the quantity of labor supplied, and output.
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