191hw2-09 - employed. Assume that labor is the only...

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1 Econ 191 Sprig 2009 Francis Lui Problem Set 2 Due: March 10, 2009, 1:20pm. 1) A pill has been invented to make 4 hours of sleep a night equivalent to the present 8 hours so that the maximum possible leisure per day increases from 16 hours to 20 hours. People will work longer hours. True, False or Uncertain? 2) A student registered in Econ 191 went to restaurant A where Cokes and beers cost $10 each and drank 6 Cokes and 4 beers. He/she then went to restaurant B where Cokes cost $5 and beers cost $15 and drank 2 Cokes and 6 beers. He/she was “rational” enough to pass the exam of 191 the next day. True, False or Uncertain? 3) Pindyck, Rubinfeld and Koh, p. 105, # 15. 4) (Labor-managed economy). In a free market economy, wage rate is equal to the value of the marginal product of labor. In a labor-managed economy (like the former Yugoslavia), wage rate is the average product of labor, i.e., PY/L, where P is the price of the output, Y is total output, and L is the quantity of labor
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Unformatted text preview: employed. Assume that labor is the only variable input in the production and the production function is given by Figure 1. If the workers want to maximize their wage rate, how much labor will they employ? Now assume that the price level increases. As a result, the production function shifts upward. What will happen to the optimal level employment and real output Y? (Hint: Determine graphically the L that maximizes PY/L.) Suppose the demand curve for the output shifts upwards, what will happen to output in this economy? PY Figure 1 L 5) Suppose the utility function of a person is Cobb-Douglas, i.e., U(X, Y) = AX α Y β . Let Px, Py, and I represent the price of good X, the price of good Y and income, respectively. Derive the demand function of good X in terms of Px, Py and I. (Hint: You may use the result on p. 12 of the Lecture Notes. Chap. If you are good at calculus, you will also find the appendix of Chapter 4 useful.)...
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