Problem Set 2SP11

Problem Set 2SP11 - d Suppose the price of bread increased...

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Economics 305 Dr. Neri Fall 2010 Problem Set No. 1 due at the beginning of lecture on Tuesday February 22. E-mail submissions will not be accepted. Late submissions will have points deducted. Please put you name IN INK on the top of all papers submitted. 1. Assume that the production function is given by Y = A K .4 L .6 where Y = National Income =GDP, K = 100, L= 400, and A = 10. a. What is National Income (Y)? b. Derive the equation for the marginal product of labor (MP L ) c. What happens to the MP L as K increases? d. Derive the equation for the marginal product of capital (MP K ) e. What happens to the MP K as K increases? 2. The table below describes the key elements in deriving a labor demand curve for a bakery. Complete the table and answer the following questions. a. At what employment level does the firm encounter diminishing marginal returns? b. Draw a graph of the (MP) column. Plot the number of workers on the horizontal axis and dollars on the vertical axis. What does this curve represent? c. How many workers will the bakery hire if the nominal wage rate is \$8?
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Unformatted text preview: d. Suppose the price of bread increased to \$2 per loaf. How many workers will the bakery hire if the nominal wage rate is \$8? How many workers will the bakery hire if the nominal wage rate is \$16? 3. a. Mankiw, Chapter 3, Problems and Applications, Question 7 on page 77. (Question 7 on P. 74 of 6 th Edition, Question 4 on page 70 of the 5 th Edition.). b. Using the long run model of the economy developed in chapter 3, graphically illustrate the impact of the tax increase discussed in part A. Be sure to label: (a) the axes; (b) the curves; (c) the initial equilibrium values; (d) the direction of curve shifts; and (e) the terminal values. c. State in words what happens to: (a) the real interest rate; (b) investment; (c) consumption; and (d) output. 4. Mankiw, Chapter 3, Problems and Applications, Question 1 on page 76. (Question 1 on P. 73 of 6 th Edition, Question 6 on page 69 of the 5 th Edition.)....
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