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Applied Macro, Chapter 3

# Applied Macro, Chapter 3 - Applied Macro Chapter 3...

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Applied Macro Chapter 3 exercises Review Questions 1, 5, 6, 8 and 12 1. What is a production function? What are some factors that can cause a nation’s production function to shift over time? What do you have to know besides an economy’s production function to know how much output the economy can produce? The production function is a mathematical expression relating the amount of output produced to quantities of capital and labor utilized. A convenient way to write the production function is Y = AF (K, N). Some factors that can cause a nation’s production to shift are changes in supply or supply shock mainly cause by technological changes and improve in the ways of doing things or improve in productivity. Other factors you have to know are the capital stock, or quantity of capital used in the period and the number of workers employed in the period. 5. What is the MPN curve? How is the MPN curve related to the production function? How is it related to labor demand? The marginal product of labor, or MPN, is the additional output produced by each additional unit of labor. As with the marginal product of capital, for small increases in employment, the MPN can be measured by the slope of the line tangent to a production function that relates output and labor. It is related to labor in the sense that the principle of diminishing marginal productivity applies for both, and for similar reasons: the greater the number of workers already using a fixed amount of capital and other inputs, the smaller the benefit of adding even more workers. 6. Use the concepts of income effect and substitution effect to explain why a temporary increase in the real wage increases the amount of labor supplied, but a permanent increase in the real wage may decrease the quantity of labor supplied. Under the substitution effect, a temporary increase in real wage will cause workers to supply

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Applied Macro, Chapter 3 - Applied Macro Chapter 3...

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