HW 2 (100 points)
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
b)
If Labor supply curve is
)
/
(
p
w
L
s
=
, calculate the equilibrium levels of real
wage, labor and output.
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?
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.
Question 2 (70 Points)
Consider a
closed
, representative agent economy in which the household lives for two
periods, youth and old age. The household has 40 units of endowment when young and 0
units when old. Suppose that there is a firm in this economy, which produces output in
the second period from investment done in the second period according to the technology
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 Spring '08
 KISINA
 Supply And Demand, investment demand function, optimal consumption levels

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