Solve the equations that characterize the optimal allocation

Reference no: EM13179192

Government consumption in our model is simply a "waste", that is it does not affect anyone's utility or affect the production process. Use the Pareto Optimality framework. For each of them, solve the social planner's problem and show the equations that characterize the optimal allocations. Then argue how a change in G would affect the choices (consumption , labor supply and also output) by the social planner.

a. Government expenditures increase household's utility by another term in the utility function : log (G).

b. Government expenditures add to the existing private capital stock, so the capital stock of firms is now K+G.

Reference no: EM13179192

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