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Villanova University Fall 2014 Economics2101




Question;Villanova University;Fall 2014;Economics 2101 Dr. Victor Li;Problem Set #2;Due: Thurs 9/18 (in class);Each student is to turn in their own assignment. It is to be;hand-written and it must be legible. To receive;credit you must show all work. Please ?Box? your final;answers.;1. Textbook, Chapter 3, Numerical Problem 1 (p 100), Part;(a) only.;2. Suppose that the economy's supply side can be described;by the following;Production function: Y = A [(12)N - (1/4)N2;where A = 10.;(a) Graph the production function for N = 5, 10, 15, 20, and;25. Does it have diminishing;returns? Explain.;(b) Suppose that the firm can only hire in groups of 5 and;must pay each worker a nominal;wage of W = 20. If the price level is P = 2, calculate the;real wage rate paid to each;worker. How many workers should the firm hire to maximize;profits?;Instead of groups, for the rest of this problem assume that;firms can hire any amount of labor;even fractions (i.e. labor is perfectly divisible). The;marginal product of labor is given by;Marginal Product of Labor: MPN = A [12 - (1/2)N];(c) If the price level is P = 2 and the nominal wage W = 20;how much labor will firms;demand (ND)? Suppose that the nominal wage increases to W =;70. Calculate what will;happen to ND?;(d) What is the equation for the labor demand curve that;expresses ND as a function of the;real wage rate (?)? Illustrate the ND curve in a graph using;the real wage rates from part;(c).;The Labor Supply Equation is given by NS = 5 + 2?;(e) Compute the equilibrium quantity of labor (N) and real;wage (?). What is the full;employment level of output (Y)? Illustrate your answer in a;clear diagram of the labor;market and production function. 3. Given the labor market;production information in Problem 2, suppose that increases in the;price of energy and oil adversely affects the manufacturing;sector and lowers total productivity;which reduces A to 2 (a negative productivity or supply;shock).;(a) Graph the production function for N = 5, 10, 15, 20 and;25.;(b) Assume firms can hire any amount of divisible labor.;What will be the new equation for;the labor demand curve?;(c) Compute the new equilibrium quantity of labor, real;wage, and full employment level of;output. How has the supply shock affected the full;employment level of output? On the;same diagram as Problem 2 (e) illustrate your answer by;indicating how each curve has;shifted and in which direction.;4. The marginal product of labor in the economy is given by;MPN = 200 - 0.5 N, while the supply;of labor is NS = 100 + 4?;(a) Find the market;equilibrium real wage rate and quantity of labor. Graph your answer.;(b) What happens if;the government imposes a minimum wage of 40? Is there involuntary;unemployment? Graph your answer.;(c) What happens if;the government imposes a minimum wage of 60? Is there involuntary;unemployment? Graph your answer.;5. Suppose that the population of a country is 200,000.;There are 30,000 retired persons, 10,000;full time students, and another 150,000 have a full or part;time job. All other persons are;looking for work. Calculate the following;(a) Number of;unemployed, labor force, labor force participation rate, employment ratio, and;unemployment rate.;Suppose 2,000 of the;10,000 students graduate: 1,000 of them find a job right away and 1,000;are still looking.;(b) Redo part (a). Are there more people working now than;before? What has happened to the;unemployment rate? Is the unemployment rate a good indicator;of the level of employment;in this question?;6. For each year the following table contains information;about actual real GDP (Y), the full;employment level of GDP (Y), and the unemployment rate (u).;Use the growth rate version of;Okun?s Law to fill in the blanks;YEAR Y Y u;1 1000 1000 5%;2 1050 1030 (a);3 1029 (b) 6%;4 (c) 1082.12 5%


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