midterm - MIDTERM, GRADUATE MACRO, ECON 606 Jonathan...

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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 Cobb-Douglas: Y i = z i F θ i n 1 θ i i = a, o where 0 θ 1 .z i , which determines sector-speci 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 rst-order Markov process de f ned by the transition probability matrix Π . In f ntely-lived 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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midterm - MIDTERM, GRADUATE MACRO, ECON 606 Jonathan...

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