When taxes are included in the stylized DSGE model, with Cobb-Douglas production, labor demand is given by:
A) $w = \bar { \ell } \cdot \frac { ( 1 - \tau ) w } { c }$
B) $\Delta L = \bar { s } f ( K , L ) - \bar { n } L$
C) $w = \pi ^ { e } + \bar { v } \tilde { Y } + \overline { \bar { a } }$
D) $w = \bar { m } ( \pi - \bar { \pi } )$
E) $w = ( 1 - \tau ) \cdot 2 / 3 \cdot \frac { \bar { A } K ^ { 1 / 3 } } { L ^ { 1 / 3 } }$

Question

Quizplus · Accepted Answer

In a DSGE model with Cobb-Douglas production, labor demand is derived from the marginal product of labor. When taxes are included, the after-tax wage is adjusted by the factor $ (1 - \tau) $, and the Cobb-Douglas production function implies a specific form for the marginal product of labor.

When Taxes Are Included in the Stylized DSGE Model, with Cobb-Douglas