1. Consider a 2x2 static general equilibrium model with a government (1 consumer household, 2 goods A and B and 2 factors of production capital - K and labor - L) of a simple closed economy. The production functions of the two goods and the utility function of the household is of the Cobb-Douglas type. Share parameters of the utility function of both households 0.5 while production of good A is more capital intensive than production of good B. The household owns the endowments of K and L. Structure of government expenditure is 0.2 on good A and 0.8 on good B. The government income is entirely derived from taxes levied on income of houeholds. The budget is balanced (government spends all its earnings by adjusting consumption keeping the goods shares constant). Consider a 20% increase in the income tax rate. Desribe the likely effects on:

   (a) the domestic production of goods A and B and their prices (what will happen with demand for those goods) (b) the wages of factors of production

   (c) the overall government spending and the the utility level of the household.