LH Advanced Macroeconomics (07 33109)

Seminar Class 1: Real Business Cycle Theory (Week 3)

Q1. Consider the following Cobb-Douglas production function (0< α<1):

𝑌𝑡 = 𝐾𝑡𝛼 (𝐴𝑡 𝐿𝑡 )1−𝛼

which shows that output depends upon capital input, labour input and ‘technology’ (A).

i) Show that the marginal product of capital is positive (for K,L,A>0) but
diminishing in the level of capital employed.
ii) Show that the marginal product of labour is positive for (K,L,A>0) but
diminishing in the level of labour employed.
iii) Provide an economic interpretation for the parameter α.

Q2. Consider the one-period RBC model studied in the lecture notes but now suppose the
utility function for households is:

𝑢𝑡 = ln 𝑐𝑡 + 𝑏(1 − ℓ𝑡 )1−𝛾 ⁄(1 − 𝛾)

where b>0 and γ>0.

How, if at all, does labour supply depend on the real wage under this new functional form
for utility?

Q3. For the two-period RBC model, show that a logarithmic instantaneous utility function
of the form (where b>0 is a leisure preference parameter):

𝑢𝑡 = ln 𝑐𝑡 + 𝑏 ln(1 − ℓ𝑡 )

with arguments in consumption (𝑐𝑡 ) and leisure time (1 − ℓ𝑡 ), produces an intertemporal

elasticity of substitution of 1 between period 1 and period 2 leisure time. Explain how
this is relevant to the labour supply in the two-period RBC model.