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ps3ans2008 - Economics 205 Principles of Macroeconomics...

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Economics 205: Principles of Macroeconomics Mark Moore FALL 2008 Problem Set 3: Solutions 1. When property rights are uncertain or the government is unstable, there is less incentive to invest in new capital and to spend resources on research into new ideas, because the potential rewards to these activities may be taken by theft, excessively high taxation, or perhaps even military seizure in a civil war. 2. The increase in labor productivity in leading-edge industries in country A is likely to enable country A to produce high tech goods more cheaply, because less labor is required to produce these goods. On the other hand, the increase in labor productivity in these industries is likely to increase the real wage in country A, because the real wage is related to the marginal productivity of labor. As a result, the cost of services like haircuts, which use labor but do not experience much productivity gain, are likely to rise. So, haircuts are likely to be more expensive in country A than in country B.
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