Question

Assume that the production function takes the form, F(K, N) = K$^\alpha$N$^{1-\alpha}$, while $\delta$ = 1 and the momentary utility takes the following functional form: u(C) = log C. (a) (10 points) Solve for the competitive equilibrium level of capital accumulation, K$_2$. (b) (6 points) How does capital accumulation respond to an increase in the discount factor $\beta$? How does consumption respond in each period? Explain intuitively. (c) (8 points) How does capital accumulation respond to an increase in the tax rates, $\tau_t$ for t = 1, 2? How does consumption respond in each period? Explain intuitively.

          Assume that the production function takes the form, F(K, N) = K$^\alpha$N$^{1-\alpha}$, while $\delta$ = 1
and the momentary utility takes the following functional form:

u(C) = log C.
(a) (10 points) Solve for the competitive equilibrium level of capital accumulation,
K$_2$.
(b) (6 points) How does capital accumulation respond to an increase in the discount
factor $\beta$? How does consumption respond in each period? Explain intuitively.
(c) (8 points) How does capital accumulation respond to an increase in the tax rates,
$\tau_t$ for t = 1, 2? How does consumption respond in each period? Explain intuitively.

Assume that the production function takes the form, F(K, N) = K^αN^1-α, while δ = 1
and the momentary utility takes the following functional form:

u(C) = log C.
(a) (10 points) Solve for the competitive equilibrium level of capital accumulation,
K2.
(b) (6 points) How does capital accumulation respond to an increase in the discount
factor β? How does consumption respond in each period? Explain intuitively.
(c) (8 points) How does capital accumulation respond to an increase in the tax rates,
for t = 1, 2? How does consumption respond in each period? Explain intuitively.

Added by Joseph K.

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