Question

In country RBC, only labor is used in production. The production function is Y = z*N, where z is labor productivity. In country RBC, economic booms and recessions are due to cyclical movements of z*s. For simplicity suppose that z takes two values: either z = 195 or z = 205. The chance that z = 205 is 0.7 and the chance that z = 195 is 0.3. Roughly, country RBC is in economic boom 70% of time and recession 30% of the time. The representative household in country RBC has utility u(c, l) = √ c + 20√ l

1. (8 points) Compute the competitive equilibriums in country RBC in booms and in recessions.

Answer 1