ECO 305 hw2

# ECO 305 hw2 - Adebayo Adesina 106223646 Due Date: March 16...

This preview shows pages 1–3. Sign up to view the full content.

Adebayo Adesina 106223646 Due Date: March 16 Question 1 (30 Points) Consider an economy with the production function ) 3 / 1 ( L Y = a) Derive the Labor demand Curve Y= L(1/3) Max = Ld^(1/3) – (W/P)Ld = (1/3)Ld^(-2/3) =(W/P) W/P=1/3(Ld^(2/3)) b) If Labor supply curve is ) / ( p w L s = , calculate the equilibrium levels of real wage, labor and output. Equilibrium levels of real wage can’t be found 3L*= L^(-2/3) L^(1)/L(-2/3)=1/3 L*= .517 (Y) = (.517)^(1/3)= .803 c) Assume 45 = s M and 3 = k . What is the equation of the aggregate demand curve for this example and what is the equilibrium price level? Aggregate Demand Curve MS=K.P.Yd 45=3.P.Yd Aggregate Demand Curve 15= P.Yd Price Level P= 15/Yd

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
d) Now assume that because of a new innovation, the productivity of labor rises, and ) 3 / 1 ( 4 L Y = . Calculate what happens to the real wage, labor, price level and aggregate output. Provide graphs of the labor and output markets to illustrate your results and show the changes on the graphs. 4Y(1/3) is new Y
This is the end of the preview. Sign up to access the rest of the document.