1. Consider a household in the static two-good model with preferences over two goods, do- mestic goods c₁ and imported g

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1 Consider A Household In The Static Two Good Model With Preferences Over Two Goods Do Mestic Goods C And Imported G 1 (31.34 KiB) Viewed 57 times

1. Consider a household in the static two-good model with preferences over two goods, do- mestic goods c₁ and imported goods c2, represented by the Cobb-Douglas utility function: u(c₁, c₂) = cica where 1 > a > 0. Domestic goods are priced at P₁ while imported goods are priced at (1+7) P2, where 7> 0 is a rate of tariff imposed by the domestic government. The household receives an exogenous flow of income, Y. (a) Write down the budget constraint for the household. (b) Express the consumer's optimality condition in terms of the utility function. (c) Solve for optimal choices (c₁*, 02*) in terms of exogenous variables only. (d) Perform comparative static analysis to mathematically show how an increase in the tariff rate would affect the total quantity of consumption, c₁* + C₂*.