5. Consider the one-period economy model with the following U (c,l) = a Inc + (1...

 

Transcribed Image Text:

5. Consider the one-period economy model with the following U (c,l) = a Inc + (1 − a) ln(1 − 1) - y = Aly with no taxes and government spending. c and I denotes consumption and labor respectively, and A is a constant denoting productivity. a. Solve for the competitive equilibrium. b. From the solutions, determine what happens to consumption and employment when productivity (A) increases. Explain using the substitution and income effects. 5. Consider the one-period economy model with the following U (c,l) = a Inc + (1 − a) ln(1 − 1) - y = Aly with no taxes and government spending. c and I denotes consumption and labor respectively, and A is a constant denoting productivity. a. Solve for the competitive equilibrium. b. From the solutions, determine what happens to consumption and employment when productivity (A) increases. Explain using the substitution and income effects.