1)

U(C, l) = 0.9 ln(C) + 0.1 ln(l).

The total number of hours available to the representative consumer ish= 1, and the market real wage isw. The representative firm produces the final consumption good using the technology functionY=zNwhereNis the labour, andz= 2. Assume the government sets the level of its spending toG= 0.75 which has to be financed through a proportional taxt.

1. Given the linear specification of the production function, what will be the equilibrium
2. Find the Competitive Equilibrium allocation (t,l,N,Y).
3. Find the the Pareto Optimal Allocation by solving the social planner's problem.
4. What do you conclude?