hW3 - curve (e) Find real wage, employment, output and...

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HW 3 (100 points) Due Date: April 20 - Tuesday Question 1 (60 Points) Consider an exchange economy with one consumer and one firm. Consumer’s utility function is given as U(C,L)=C-(1/2)L 2 . where C is consumption and L is labor. The consumer is endowed with 1 unit of time and owns a firm with technology Y=(1.6)L- (1/2)L 2 . The turnover cost is t(w)=(0.36)L/w. The firm is not a price taker so choose w and L. (a) What happens to t as real wage increases? Give a clear intuition (b) What happens to t as labor increases? Give a clear intuition (c) Write down the firm’s maximization problem and solve it. Find real wage, labor. (d) Write down consumer maximization problem and solve it. Derive labor supply
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Unformatted text preview: curve (e) Find real wage, employment, output and natural level of unemployment in this economy. (f) Illustrate the solution graphically using Labor Supply / Labor Demand and Production Function diagrams Question 2 (40 Points) The following equations describe the money market of an economy: 5 , 1000 , 200 = =-= P M i Y P M S D (a) Derive the LM curve for this economy. Plot LM curve graph. Plot Aggregate Demand Graphs. Illustrate the relationship of these two graphs. (b) Suppose that the supply of money and the price level both decrease by 5%. What effects will these changes have on the LM curve? Explain your answer....
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This note was uploaded on 04/13/2010 for the course ECO 305 taught by Professor Kisina during the Spring '08 term at SUNY Stony Brook.

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