Compare the consumers budget constraint under policies

Reference no: EM13190943

During the past few years , the automobile industry has recieved government support. In the production economy, this support would be modeled as a transfer to the firms. Youve been asked to consider the effects of this policy. Tax revenue is collected through a lump sum tax on consumers.

No Policy: the government collects a lump-sum tax of To=40 and consumes G=40. with no policy the firm pays dividend income of 35 units to the stand-in customer. Under no policy, the representative firm behaves like our standard production economy.

Policy 1. The government is commited to transferring 10 units to firms. The government collects enough tax revenue to consume 40 units and make a lump sum transfer Q=10 to firms. Let T1 be the lump sum tax collected under this policy.

Policy 2: Instead of a lump-sum payout, this policy aims to make the firms more efficient. The proposed policy uses the 10 units to fund investments in productivity. Therefore the firm does not recieve a lump sum transfer. Rather, the firm now has a 5% increase in total factor productivity. The total tax revenue collected is the same as under policy 1 but none is transfered back to either the consumer or firm. Let T2 be the lump sum tax collected under this policy. since there is no transfer G2=T2. Assume that the stand-in consumers dividend income is the same under No policy and Policy 2.

1. For policy 1 write out the firms production function. How would their profit maximizing choice of labor compare to the choice under no policy?

2. How would the profit maximizing choice of labor under policy 2 compare to the choice under No policy?

3. Compare the consumers budget constraint under policy 1 and policy 2. (Hint: I think the easiest way to compare the two budget constraints is to graph them) Explain weather Policy 2 COULD make the consumer better off than policy 1. make sure to address the income and substitution effects.

Reference no: EM13190943

Questions Cloud

State the inventor proposed the revolutionary design : The inventor proposed the revolutionary design of the new engine based on the heat stored in the ocean. The inventor plan is to mount it on a boat in San Francisco and set off on a journey across the Pacific Ocean. Heat is extracted from the ocean

Calculate probability of a randomly selected person sleeps : According to the Sleep Foundation, the average night's sleep is 6.8 hours Assume the standard deviation is .7 hours and that the probability distribution is normal.

What must be true about the image of triangle jkl : What must be true about the image of triangle JKL under a dilation with a scale factor of 2/3 and center of dilation at point C?

How long is a side of the playground : a walkway forms the diagonal of a square playground. The walkway is 24 m long. to the nearest tenth of a meter how long is a side of the playground.

Compare the consumers budget constraint under policies : Instead of a lump-sum payout, this policy aims to make the firms more efficient. The proposed policy uses the 10 units to fund investments in productivity. Therefore the firm does not recieve a lump sum transfer. Rather, the firm now has a 5% incr..

What are the field dimensions : a rectangular field is five times as long as it is wide. if the perimiter of the field is 480yards, what are the field's dimensions?

Define what is the mass fraction : The Al2O3 does not react. If the sample residue weighs 2.489 g, what is the mass fraction of Fe2O3 in the original sample?

Use the limit comparison test to determine if this series : Use the limit comparison test to determine if this series converges or diverges.

How far does the top of the ledder move vertically : A ladder leans against a vertical wall.When the foot of the ladder slides 5cm to the left, how far does the top of the ledder move vertically ?

User Account

All Pages