Nafiz Zaman

2/11/2021
5.
Competitive Factor Markets: w/p = MPL
Cobb-Douglas Production: MPL= a * Y/L
Thus, w/p= a * Y/L
And through simple algebra, we can rearrange the function so that the
Labor Share of Income is equal to (wL)/(pY)= a.
Thus, it seems like a constant labor share of income implies that w/p is
proportional to Y/L. The second must be true for the first to be true. If
the two trends did not follow each closely, then it would not result in a
constant share of labor. This can be seen from the equation we derived.
6.
a. [Wf, Wb] are measured in Dollars per Hour. [Pf, Pb] are measured in
Dollars per Individual Unit. [Af, Ab] are measured in Output (Quantity
Produced) per Hour.
b.
Competitive Factor Markets: Wf/Pf= Af .
If the productivity of farmers rose substantially (aka “A f”), then so too
must have the proportion between Wf and Pf. This means that the real
wage of farmers must have risen. This real wage is measured in the unit
dollars per hour (adjusted for inflation, so the average hourly wage rate
measured in dollars per hour of some base year).
c.
Competitive Factor Markets: Wb/Pb= Ab
If Ab is constant, then so too should the proportion between Wb/Pb.
This then means that the barbers’ real wage was held constant over this
same time. This real wage is measured in the unit dollars per hour
(adjusted for inflation, so the average hourly wage rate measured in
dollars per hour of some base year).
d.
Labor Mobility would mean that in the long-run the nominal wages of
farmers and barbers would equal each other. This is because in the
short-run, people would flock to the job of the farmer because they
have an increased real wage. However, this would cause a shortage of
barbers which would require an increase in wages to compensate.
Thus, in the long-run, the market will clear and the nominal wages of
each trade will equal each other.
e.
Since Wf= Wb, this would indicate that the real wage of the farmer has
increased and the real wage of the barber has been held constant.
Thereby, according to each’s real wage equation—the price of a haircut
should be more than the price of food. (Wf/Pf going up, Wb/Pb
constant mathematically, if the proportion of Wf/Pf goes up, this
would mean that the price of food is relatively less as compared to the
price of a haircut).
f.
There doesn’t seem to be much difference in terms of their purchasing
power in the long-run because they have equal nominal wages. If they
are consuming the same basket of goods and services their purchasing
power would simple be Wf/P= Wb/P. Sure, according to Parts B and C,
farmers have higher real wages but this is balanced by the fact that
they pay relatively more for a haircut and on the flip side, barbers pay
relatively less for farm produce. Thus, they both seem to benefit
equally even if at first glance it looks like a farmer makes more in terms
of their real wage.
7.
Cobb-Douglas Function: Y= (K^1/3)*(L^1/3)*(H^1/3)
a) MPL is simply the partial-derivative with respect to L:
(1/3)*(K^1/3)*(L^-2/3)*(H ^1/3). An increase in human capital (H)
would seem to lead to increases in the marginal product of labor
because it is a positive variable.
b) MPH is simply the partial-derivative with respect to H:
(1/3)*(K^1/3)*(L^1/3)*(H^-2/3). An increase in the amount of
human capital would lead to a decrease in the marginal product
of human capital (because the H variable is to the power of
NEGATIVE 2/3).
c) Income Share Paid to Labor= L * MPL=
(1/3)*(K^1/3)*(L^1/3)*(H^1/3)= 1/3(Y). Income Share Paid to
Human Capital= H x MPH= (1/3)*(K^1/3)*(L^1/3)*(H^1/3)= 1/3(Y).
Thus, since both the income share paid to labor and the income
share paid to human capital goes to the worker (though perhaps a
tad more indirectly?), they will receive 2/3rd of the total income.
d) The ratio of skilled wage over unskilled wage is simply (MPL +
MPH)/(MPL). This equation simplifies to 1 + L/H. From the
equation, we can see that any increase in human capital would
decrease this ratio since it’s the denominator.
e) Yes, as seen from the answers from the previous parts of this
question, as more and more individuals attain higher levels of
education, the amount of human capital increases which would
reduce the wage difference between the educated and the non-
 educated worker. Reducing that difference and closing off that
inequality is the definition of a more egalitarian society.
11.
If taxes and government expenditures increase by equal amounts,
then there’s no net change in public savings (T-G). However, the change
in private saving (Y- T – C(Y-T)) is equal to the negative change in T +
change in MPC of T (because Y is assumed to be fixed in the long-run). If
the MPC < 1, private saving would fall which means that national
savings would fall. The increase in taxes would reduce disposable
income which would reduce private savings. This decrease in national
savings means that the supply curve would shift to the left (which
would increase the interest rate and reduce investments).
12.
Note that we assume that firms cannot switch across sectors (i.e.
business investment to residential investment).
a. The demand curve for business investments will have to shift to the
right because of the increase in government subsidies mean that that
there are more investment opportunities (the interest rate does not
matter here) while the curve for residential investments will remain
unchanged since the tax credit is only for businesses.
b. The curve will have to shift outwards because it is a function of the
sum of business investments (whose demand curve we told you shifts
to the right because of the new policy) and residential investments
(which remained unchanged). Thus, the equilibrium interest rate will
have risen. Graphically,
c. The total quantity of investments will not change because there is an
inelastic supply of savings (assumed that the slope of loanable funds is
vertical—if it’s upward sloping then total investment would rise as
well). Business investments, as mentioned in previous parts of this
question, will rise because of the public policy but residential
investments will fall because of the rise of the interest rate as a result.
14.
a. These fluctuations in supply of loanable funds year-to-year could
come from a variety of things: decreased consumer confidence in the
market, a decrease in government purchases, reductions in income, a
decrease in yearly savings, etc. Basically, if interest rate increases, then
investments will probably decrease and the same is true in reverse (i.e.
if the interest rate decreases then more people will make investments).
Negative correlation.
b. These fluctuations in the demand of loanable funds year-to-year
could come from a variety of things: for example there could be a
negative change in the MPL which would obviously reduce the demand
for a business to loan more money or a business reconsiders their
willingness to invest in new property in the negative direction. In this
case, I’d guess that when the demand of funds decreases, interest rates
will decrease but so too will investments (and the same is true in
reverse: when the demand for funds increases, the interest rate will
increase but so too will investments). Positive correlation.
c. If they are both fluctuating over time, then there will be very little to
practically zero correlation between interest rates and investment (at
least that we can see—maybe in short-lived bursts we could see
positive or negative correlation but ultimately, we would find no real
correlation between the two).
d. I like the third situation because the reality of our world is that of
endless variance. It often does not conform to the simple rules and
assumptions that we have laid out before us. Things can often happen
even in the face of reason. Supply and demand can fluctuate wildly at
the will of society. This third situation seems the most empirically
realistic simply because it considers the randomness that often appears
in our economy.