Static GE Equilibrium and Welfare Gain Exercise | Online Assignment Help

For exercises 1-3, use the benchmark model in class where the government taxes household

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labor income and lump sum transfers it back to them.

Exercise 1: What if we were Italian? Calibrate α so as to match the average work week for Italia

for the 1970-74 period as reported in Table 2 in Prescott (2004).

Exercise 2: (Laffer Curve) Use Excel to show how the equilibrium varies with the tax rate given

the value for  from Exercise 1 above. Vary  in steps of 0.01 from 0.00 to 1.00. Plot

c, h, and tax revenue variables, hw versus  .

Exercise 3: Determine the welfare gain associated with lowering the tax rate in Europe from 0.60

to the U.S. tax rate of 0.40.

(Recall, the welfare gain in lifetime consumption equivalents of changing the tax rate from the

current U.S. rate of 0.40 to the European rate of 0.60 is the value of  such that


Therefore, (1+) is the factor that consumption must be scaled if there is a change in the tax rate

from 40% to 60% to leave people indifferent to the change. The welfare loss in consumption

equivalents is c . In effect, find the values of . and ),60.0( ),60.0( ),40.0( hcc

Exercise 4.

Consider the model economy with an alternative government policy. The commodities are labor

h and consumption c. The price of c is normalized to 1. The price of labor is the wage rate w.

A household’s problem is to maximize utility

)100ln(ln sd hc 

subject to its budget constraint  sd whc , where  is a lump sum transfer from the

government. Here the superscripts s and d indicate supply and demand

A firm’s problem is to maximize profits dd whhA  )1(  . Notice that the government

imposes a tax on the firm’s output or sales.

The government’s budget constraint is dAh  .

The consumption and labor markets clear which means that ccc ds  and hhh ds  .

Find the equilibrium for this economy; that is equilibrium ( , , , )c h w as a function of utility

function parameter  and tax policy parameter  . Note set the TFP parameter A=1

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