325_PracticePS6

325_PracticePS6 - Department of Economics University of...

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Department of Economics University of Maryland Economics 325 Intermediate Macroeconomic Analysis Practice Problem Set 6 Professor Sanjay Chugh Spring 2011 1. Lags in Labor Hiring. Rather than supposing that the representative firm at the beginning of period t can decide how much labor it would like to hire for use in period t, suppose that labor used in period t must be chosen in period t-1. (That is, suppose n is a stock (aka state) variable.) As usual, capital for use in production in period t must be purchased in period t-1 because of the “time to build” surrounding capital goods. With this lag in labor hiring, construct the lifetime (in the two-period model) profit function of the firm, and show that the real interest rate now is a relevant price for labor as well as capital goods. Provide brief economic intuition. ( Hint: Make as close an analogy with our model of firm ownership of capital as you can – in particular, think of workers in this model as being “owned” (contractually obligated to) firms.) 2. Preference Shocks in the Consumption-Savings Model. In the two-period consumption-savings model (in which the representative consumer has no control
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325_PracticePS6 - Department of Economics University of...

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