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MIDTERM, GRADUATE MACRO, ECON 606
Jonathan Heathcote
March 2nd 2006
Consider the following economy. There are two sectors: an apple sector,
and an orange sector. Both sectors use land
F
and labor
n
to produce. The
amount of land in each sector,
F
o
and
F
a
is
f
xed:
F
o
=
F
a
=
F.
The production
technology is CobbDouglas:
Y
i
=
z
i
F
θ
i
n
1
−
θ
i
i
=
a, o
where
0
≤
θ
≤
1
.z
i
, which determines sectorspeci
f
c productivity, is given by
z
o
=7
0
+
(
T
−
70)
z
a
=7
0
−
(
T
−
70)
where
T
∈
{
60
,
61
, ...,
79
,
80
}
is the average temperature in Fahrenheit in the
period, and evolves over time according to a
f
rstorder Markov process de
f
ned
by the transition probability matrix
Π
.
In
f
ntelylived consumers have identical preferences over a composite con
sumption good
C
and leisure
l.
Suppose, to start with, that labor markets are
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 '05
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