EP607: Ekonomika Makro III

Problem Set 1
Due: February 22, 2022 at 04:00 PM (GMT+7)

1. (10 points) Explain why macroeconomists like to build models.

2. (10 points) Explain why macroeconomists like to build models and why do macroeconomists build models
based on microeconomic principles? Discuss.
3. (10 points) Macroeconomists are interested in two types of phenomena: economic growth and business
cycles. Explain how macroeconomists manipulate economic data in order to study these two problems.
4. (20 points) Suppose that the government imposes a proportional income tax on the representative con-
sumer’s wage income. That is, the consumer’s wage income is w(1 − t)(h − l) where t is the tax rate. What
effect does the income tax have on consumption and labor supply? Explain your results in terms of income
and substitution effects.

5. (25 points) Suppose that a consumer cannot vary hours of work as he or she chooses. In particular, he
or she must choose between working q hours and not working at all, where q > 0. Suppose that dividend
income is zero, and that the consumer pays a tax T if he or she works, and receives a benefit b when not
working, interpreted as an unemployment insurance payment.
a. If the wage rate increases, how does this affect the consumer’s hours of work? What does this have to
say about what we would observe about the behavior of actual consumers when wages change?
b. Suppose that the unemployment insurance benefit increases. How will this affect hours of work?
Explain the implications of this for unemployment insurance programs.

6. (25 points) To control pollution, assume that your government tightens regulations on one hand and
provides a lump-sum subsidy (S) to firms that use clean technology on the other. Now, a representative
firm decides to use clean technology throughout the production process, thereby improving its total factor
productivity. How will this government policy affect the profit-maximizing firm’s choice of labor input and
labor demand curve?