To solve this model economy, we reformulate the competitive equilibrium into the social planner's problem. First...

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To solve this model economy, we reformulate the competitive equilibrium into the social planner's problem. First of all, in social planner's problem, all markets must clear, and thus N = Nd = N, and K = K = K (also K = 2, but for question 11 to 16, still remain the symbol K). Through firm's FOC with respect to N and K, we know w and r are W = ZK a To solve this model economy, we reformulate the competitive equilibrium into the social planner's problem. First of all, in social planner's problem, all markets must clear, and thus N = Nd = N, and K = K = K (also K = 2, but for question 11 to 16, still remain the symbol K). Through firm's FOC with respect to N and K, we know w and r are W = ZK a

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In the social planners problem the objective is to maximize social welfare subject to certain constr... View the full answer