Consider the two-period economy with endogenous production discussed in class. For the sake of simplicity, assume that t

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Consider The Two Period Economy With Endogenous Production Discussed In Class For The Sake Of Simplicity Assume That T 1 (62.1 KiB) Viewed 126 times

Consider the two-period economy with endogenous production discussed in class. For the sake of simplicity, assume that the utility is time separable and that the per-period utility is equal to: C1-o (1 - 1)1+4 u(C, 1) = 1-0 1+4 where o > 0 and 4 > 0 and C and I represent consumption and leisure. Moreover, the total amount of hours of time available h is such that h= 1. Assume also that the technology to produce the consumption goods has constant returns to scale. Moreover, labour is the only input to production. Hence the current and the future technology can be represented as: Y = 2N Y' = Z'N' where Y, Y' N, N', z and z' stand for output, labour and total factor productivity in the current and future period respectively. There is no government expenditure in the current and future period so that G = 0 and G' = 0. 1. Exercise 1 (a) Write down the social planner's problem. State the variables with respect to which the social planner maximises. (b) Find the conditions characterising the Pareto efficient allocation. Interpret them. (c) Find the real wages (w and w') and the firm profits (n and ') that decentralise the Pareto efficient allocation as a competitive equilibrium.