ECON 6002 Tutorial Questions (Week 4 - Endogenous Growth)
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Tutorial Questions (Week 4 - Endogenous Growth)
ECON 6002
1. Consider the Romer model as seen in class. Assume throughout that the both decentralized and the social planner solutions to it involve a positive amount of workers in R&D.
(a) Consider the social planner problem described in section 3.5, under implications. The household utility can be represented by:
(you do not need to show the steps that led to the equation above). What is the social optimal LA? (show your derivations)
(b) The government proposes a mandate to all R&D companies and force them to invest at least L(¯)A > LA(*), with LA(*) representing the decentralized equilibrium. Show that if
LA(*) <L(¯)A < LA;socialoptimum, this policy improves welfare.
(c) Is that policy likely to work in reality?
(d) Consider a subsidy given to the intermediate firms, τ. The proceeds for the subsidy are obtained via a lump sum tax to households. Briefly argue that the subsidy does not affect the Euler Equation. (there is no need to use math)
(e) Patent-holder revenues are now (1 + τ)p(L(i))L(i) − wL(i). What is the subsidy level that eliminates the markup?
(f) How is the quantity of R&D affected with the new pricing strategy (qualitatively)?
(g) Show that introducing a small subsidy τ proportional to the unit costs of R&D increases welfare.
(h) How would you compute the subsidy that implements the social optimal?
2023-09-03