191hw2-10 - Econ 191 Sprig 2010 Francis Lui Problem Set 2...

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1 Econ 191 Sprig 2010 Francis Lui Problem Set 2 Due: March 11, 2010, 2:50pm. 1) 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? Explain. 2) Pindyck, Rubinfeld and Koh, p. 105, # 15. 3) (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 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
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