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Unformatted text preview: People will have tended to buy less of the goods whose prices have increased since the base year, which means that the base year weight on inflationary goods is higher than in the real world, thus making the cost of living increase estimate bigger than in the real world. 12. B 13. Answer: nominal wage = p*mpl is the marginal condition equating marginal cost to the marginal benefit to the firm of an additional unit of labor (1/2 point). Dividing through both sides by P, we get w/p=mpl (1/2 point). Under the assumption of diminishing returns, mpl falls (w/p falls) as L rises, thus Labor demand rises as L falls. (1 point) 14. Answer: Initial graph labeled correctly, slopes correct (1 point). Employment tax reduces marginal benefit of workers so Ld shifts down (1/2 point), real wages and L fall (1/2 point) (or could equivalently argue that workers demand a higher w/p at any L so Ls shifts up). 15. B 16. A 17. A 18. C 19. A 20. C...
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- Fall '08