examandkey2006 - Final exam AREP 263 Fall 2006 You have...

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Final exam, AREP 263 Fall 2006 You have three hours to work on this exam — closed book, closed notes. Please return the exam to me or to my mailbox in 207 Giannini by 5 PM on Friday. Answer all questions. You cannot avoid using mathematics to answer these questions. However, DO NOT GET BOGGED DOWN IN ALGEBRA. It is su cient to provide a clear statement of the algebraic manipulations that you would perform, and the nature of the result that you would obtain. I hope that there are no typos or ambiguities in the following questions. If you f nd a problem of this sort, just be sure to let me know what assumptions you have made. Question 1. Consider the following two-sector model, with total stock of labor = 1. The amount of labor in the manufacturing sector at time t is equal to L ( t ) . The value of output in the manufacturing sector is Lf ( L ) with f 0 ( L ) > 0 The increasing returns to scale in the sector are external to the f rm, so each worker receives the wage w = f ( L ) . The value of output in the agricultural sector is (1 L ) a ; the agricultural wage is the constant a .A s s um e t h a t f (0) <a<f (1) .T h e F ow of labor into the manufacturing sector is m . The social cost of migration is γm 2 / 2 ,andeachwo rke rwho changes sectors pays the migration cost γ | m | . The constant discount rate is r . a) (Economic interpretation) (i) How would the model change if the increasing returns to scale were internal to the f rm? (ii) What is the impli- cation of the assumption that
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the present discounted value of wages minus adjustment costs. (Your answer should explain what you mean by “rational point expectations”.) d) Can you design a tax policy that causes the competitive equilibrium to produce the socially optimal program?
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This note was uploaded on 08/01/2008 for the course ARE 263 taught by Professor Karp during the Fall '06 term at Berkeley.

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examandkey2006 - Final exam AREP 263 Fall 2006 You have...

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