Answer Happy

Part 1: Illustrate general equilibrium and the Laffer curve in the context of a repre- sentative consumer with a utility function: U(C, 1) = ln(C) +In(1) that he or she maximises subject to a constraint: C=w(1 – t)(h-1) + where w, h,1,C,t and T are wages, hours of time available, leisure, consumption, tax rate, and dividend income. The production function for this economy is given by Y =C+G=A[h - 1)/2 Assume that h=1, A = 1 and that the government has a balanced budget. (A) Find the equilibrium by matching the Marginal Rate of Substitution to the Marginal Rate of Transformation and then substitute into the constraint. Also take into account that profits are non-zero for this setup. (25 marks) (b) Plot the government tax revenue for 0 <t < 1, and for a required revenue of 0.25, show that there are two tax rates that achieve this. What are they? (10 marks) (c) Either analytically or from your Laffer curve plot, find the value of t that maximizes (5 marks) tax revenue.