Chapter 5 Flashcards
What is the equation representing labor demand in competitive equilibrium?
N d = N s = h – l
In the equation C = z(h – l) - G, what does C represent?
Consumption
What is the maximum quantity of consumption when the quantity of leisure is zero?
zh - G
At point A on the production possibilities frontier, what is the value of C?
C = zh – G
What is the labor supply when C = 0 at point B?
l = h – G/z
What is the consumer’s budget constraint equation?
C = w(1 – t)(h – l) + π
What do profits for the firm equal in the equation Π = Y - w N d?
(z – w) N d
If z = w, what is the firm’s profit?
Zero
The firm’s demand curve for labor is perfectly elastic at what wage?
w = z
What happens if z – w < 0 for the firm?
The firm hires no labor
What is the budget constraint in equilibrium with w = z and Π = 0?
C = z(1 – t)(h – l)
Which points represent the Pareto-optimal and competitive equilibrium?
Point E is Pareto-optimal; Point H is competitive equilibrium
What does the revenue equation REV = tz[h – l(t)] represent?
Total revenue generated by the government
What is the relationship described by the Laffer curve?
Income tax revenue and the income tax rate
When is tax revenue zero according to the Laffer curve?
When t = 0 and t = 1
What tax rate maximizes government tax revenue?
t = t*
What are the two equilibrium tax rates in relation to government spending G?
t1 (low tax rate) and t2 (high tax rate)
In the low-tax-rate equilibrium, how do consumption and leisure compare to the high-tax-rate equilibrium?
Consumption is higher and leisure is lower
