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Macroeconomics 31-234
Spring 2016
Problem Set 2
Due Wednesday, February 10th

1
...

a
...
Provide an economic explanation of the shape of the curve(s)
...

However, the graph levels out after a certain point due to the marginal product of
labor concept, which implies that with each extra form of output, it results in less
labor
...
List the endogenous and exogenous variables in this model
...

Endogenous variables in this model are represented by labor, N, and output, Y
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2
...

a
...


b
...
(Here is a hint: What happens to ΔY for any increase in capital, or ΔK, or
for any increase in labor, or ΔL)


∆𝑌

𝑀𝑃𝐾 = ∆𝐾 =

𝑌2 −𝑌1
,
𝐾2 −𝐾1

in which

1
...
1𝑌2
𝐾2 −𝐾1

𝑌 −𝑌

= 1
...
Is it possible for a beneficial supply shock to leave the MPK and the MPL unaffected? Why
or why not?
 It is not possible because the entire production function in this case would have to
shift upwards, but it would not be able to change slopes, meaning the graph would
begin at a certain set level of production with 0 workers instead of at the normal
level of 0 output with 0 workers
...
How would each of the following affect the current level of full-employment output? Be sure to
fully explain your answer
...
A large number of immigrants enter the country
...
Energy supplies become depleted
...
New teaching techniques in the classroom improve the performance of all high school
seniors
...
A new law requires some forms of capital the government considers unsafe to be
dismantled
...
An economy has the following production function:
Y = 0
...


a
...
What is the MPK? Does the MPK diminish?
 In this case described, the Marginal Product of Capital, or MPK, with labor being
held constant, equals
...
The MPK in this case does not diminish
...
Graph the relationship between output and labor, holding capital constant at its current
value
...
Compare that result with the
MPL for an increase in labor from 110 to 120
...
95
...
91, therefore meaning there was a
diminishment in MPN
...
The following questions deal with the labor market
...
Draw a clear and neatly defined diagram of the labor market
...

c
...


e
...

 The model for the labor market demonstrates an equilibrium point where the
demand for labor meets the supply of labor
...

List the endogenous and exogenous variables in this model
...
The exogenous
variables in this model are still in this model capital, K, and A, technology
...
Provide an economic explanation for why each of these variables
would shift the demand for labor function
...

List the variables (and the direction of their change) that would shift the supply of labor
function to the right
...

 A decrease in technology or factors of production would shift the supply of labor to
the right
...
But as a result, there would be less of a need for
employment
...
Suppose that the supply of labor increases
...
Complete answers will include a graph
...
The wage level will decrease because firms will not be willing to pay the
extra wages for too many in the labor force
...


6
...
What does it mean to have
negative cyclical unemployment?
 Cyclical unemployment is the excess of the actual unemployment rate over the
natural rate of unemployment; equivalently, unemployment that occurs when
output is below its full-employment level also classifies as cyclical unemployment
...
Negative cyclical unemployment
means that there is no excess of the actual unemployment rate, which would in turn
would create an output that is above its full-employment level
...
Use the concepts of income effect and substitution effect to explain why a temporary increase in
the real wage rate increases the amount of labor supplied, but a permanent increase in the real
wage rate might decrease the quantity of labor supplied
...
For example, if an employee
received a bonus or won a portion of the lottery, the worker may spend less time
working and more time with leisure
...
The substitution effect
would be negative because there would be too much leisure time and labor would
decline too much, decreasing output
...
How would each of the following affect Thad’s supply of labor?
a
...
[5 points]


If the value of his house triples in the market, as a result, the supply of labor for Thad
would shift to the right
...
Originally an unskilled worker, he acquires skills giving him access to a higher-paying job
(Assuming his preferences for leisure are not affected by the change in jobs)
...

c
...
[5 points]
 Thad’s supply of labor in this case would adjust with a shift to the right, resulting in a
lower wage for an increase in work for the current year since the income tax is
lower
...
Suppose that the production function for an economy is Y=9K0
...
5
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5K0
...
5
...

a
...
Find the equation for the labor
demand curve
...

b
...
3
...
Now assume that there is a minimum wage of w=2

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