Assignment 3

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					Columbia College - Econ105                                             Azadeh Khoshaien

                               CHAPTER 3 - Assignment 3

1. Suppose the marginal product of labor in the economy is given by MPN = 0.002(16,000 - N),
while the supply of labor is 1000 + 1000w.

(a) Find the market-clearing real wage rate and level of employment.

(b) What happens to the wage rate and employment if wealth rises, reducing the supply of labor
to 500 + 1000w?

(c) What happens to the wage rate and employment if after wealth has risen as in part (b), there
is a productivity shock that increases the marginal product of labor to MPN = 0.0025(16,000 -
N)?




2. How would each of the following events affect the level of employment and the real wage
rate? Explain which curves in the labor market diagram would be affected and show your work.

(a) The stock market falls sharply.

(b) A war destroys a substantial amount of a country's physical capital.

(c) A new law reduces immigration of workers into the country.




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Columbia College - Econ105                                              Azadeh Khoshaien

3. Suppose oil prices fall temporarily, as oil becomes more plentiful. What impact is this likely to
have on the production function, the marginal products of labor and capital, labor demand,
employment, and the real wage?




4. How would each of the following events affect the level of employment and the real wage
rate?

(a) A tremendous boom occurs in the stock market, increasing people's wealth by $100 billion
overnight.

(b) A major government loan-guarantee program goes bust, losing $500 billion. To pay off the
loss, the government announces that tax rates will rise 30% in the future.

(c) A nuclear mishap contaminates all auto plants in the Detroit area, destroying their capital.

(d) Medical science cures the common cold, causing fewer work days lost due to illness, thus
greatly increasing labor productivity.




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