Due to the COVID-19 pandemic, the government prohibited private companies with more than 20 employees from...

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Due to the COVID-19 pandemic, the government prohibited private companies with more than 20 employees from opening more than 30 hours per week. In contrast, before the pandemic, those companies may open up to 60 hours per week. We will study the macroeconomic effect of this type of policy. The consumer chooses consumption c and leisure l to maximize utility u(c, l) subject to his budget constraint: c = w(h – 1) + a. The firm has a Cobb-Douglas production function: y = zk"n'-a, 0 <a<1 and chooses n to maximize profits: T = y - wn. In equilibrium, labor demand n equals labor supply n =h – 1. Let c1,l1 be the consumption-leisure bundle chosen by the consumer in equilibrium before the work week is reduced. a. (7 points) Now suppose that the government requires the consumer to consume at least l* units of leisure. Suppose that l* > l1, and describe the effect (up, down, no change, or ambiguous) of this policy on labor input n, real wage w, total output y, consumption c, and the utility of the consumer u(c, l). b. (7 points) Suppose instead that I* < l1, and describe the effect (up, down, no change, or ambiguous) of this policy on labor input n, real wage w, total output y, consumption c, and the utility of the consumer u(c, l). c. (6 points) In your opinion, is this a good policy? Briefly (one paragraph) explain why you think it is or isn't a good policy. You can use your answer to (a) and (b) or you can refer to considerations that are not included in our model. Due to the COVID-19 pandemic, the government prohibited private companies with more than 20 employees from opening more than 30 hours per week. In contrast, before the pandemic, those companies may open up to 60 hours per week. We will study the macroeconomic effect of this type of policy. The consumer chooses consumption c and leisure l to maximize utility u(c, l) subject to his budget constraint: c = w(h – 1) + a. The firm has a Cobb-Douglas production function: y = zk"n'-a, 0 <a<1 and chooses n to maximize profits: T = y - wn. In equilibrium, labor demand n equals labor supply n =h – 1. Let c1,l1 be the consumption-leisure bundle chosen by the consumer in equilibrium before the work week is reduced. a. (7 points) Now suppose that the government requires the consumer to consume at least l* units of leisure. Suppose that l* > l1, and describe the effect (up, down, no change, or ambiguous) of this policy on labor input n, real wage w, total output y, consumption c, and the utility of the consumer u(c, l). b. (7 points) Suppose instead that I* < l1, and describe the effect (up, down, no change, or ambiguous) of this policy on labor input n, real wage w, total output y, consumption c, and the utility of the consumer u(c, l). c. (6 points) In your opinion, is this a good policy? Briefly (one paragraph) explain why you think it is or isn't a good policy. You can use your answer to (a) and (b) or you can refer to considerations that are not included in our model.

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