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Name: Quan Hao

Student Number:250721755

Econ Assignment #4

Question 1
1.
2.
3.
4.
5.

True
True
True
True
False : If the government where to institute something like the one-child-only
policy introduced in China, this would have the effect of reducing the rate of
population growth for each level of consumption per worker. The function
G1(c) shifts down to G2(c) as the result of the population control policy In the
stead state consumption per worker increases from C1 to C2

G1(c)
G2(c)
1
N/N

C1

6.

C2 Consumption per worker, C

False. Failure of economic convergence in the data may be explained by


factors that influence total productivity according to the Solow Growth Model.
In the endogenous growth model however, two identical countries that differ
only in their initial incomes will never converge.

Name: Quan Hao

Student Number:250721755

Econ Assignment #4

Question 2
i.

For constant returns to scale

em ( xQ , xA )=xem ( Q , A )
em (Q , A )=0.8Q 0.5 A 0.5
0.5

0.5

em ( xQ , xA )=0.8 ( xQ ) ( xA ) =x0.8 Q

0.5

0.5

A =xem ( Q , A ) Therefore the function

has constant returns to scale


ii.

Definition: Labour market tightness, j, is the ratio of potential employers A,


to potential employees Q.

j= A / Q

The probability of finding a job

Pc

is equal to the number of

matches M, divided by the number of potential employees Q.

M
=e j 1 y =Pc . Labor market tightness is therefore positively related to the
Q
probability of a working finding a job. As j increases, so does Pc, the
probability of finding a job.
iii.

Match surplus is the total gain from coming to an agreement on the wage
bargaining. The surplus is defined to be the difference between the benefit
they achieve in agreement and the alternative they have when they cannot
agree.
The total match surplus is the sum of the worker-side match surplus and the
firm-side match surplus:

( wb ) + ( zw ) =zb
Let a represents the bargaining power of the worker, then

w b=a (zb)
Solving this equation for the wage

w =az+ ( 1a ) b

iv.
v.

V (Q )=b+ e j 1 y ( w b )=b+ e j 1 y a(zb)


The job filling probability is

pf =

M
Q
=e
A
A

A
A

1 y

( )( )

=e

1
j

()

Name: Quan Hao

vi.

Student Number:250721755

When forming a job match, the firm produces the output z from the filled
vacancy while paying the wage w to the worker and the vacancy cost k. If
firms are unsuccessful in filling a vacancy, the firms produce nothing and just
pay the vacancy cost k. Therefore, the expected profit from posting a job
vacancy is given by:

pf ( zwk ) + ( 1 p f ) (k )= p f ( zw ) k=e
vii.

Econ Assignment #4

1 (
zw )k
j

()

Equilibrium market tightness can be solve by using the firms optimization

condition which is

1 y
k
=
j
( 1a ) ( zb )

()

and solving for j by rearranging.

After finding j one can determine Q, the number of job searchers, using the
consumer optimality condition.

( 1, j ) a(z b)
V (Q )=b+ em To solve for Q we fix j and

take the inverse of this function.


Finally, for unemployment, either an individual finds a job or they do not. The
sum of who do find a job, divided by all individuals in the labor force gives up
the unemployment rate.

viii.

To solve for j we have

1 y
k
e
=
j
( 1a ) ( zb )

1 Y
k
=
j
e ( 1a )( zb )

()

k
j=
e ( 1a )( zb )

()

] [
1
y

e ( 1a )( zb )
=
k

1
k
=
j e ( 1a )( zb )

1
y

1
y

To solve for Q we have

( 1, j ) a( z b)
V (Q )=b+em ,
Now fixing j and taking the inverse we have

Q=v1 [ be j 1 y a ( zb ) ]
u=

Q ( 1Pc )
Q

=1P c =1e j 1 y

Finally solve for unemployment using

Name: Quan Hao

Student Number:250721755

Econ Assignment #4

Question 3
i.
'

K szF ( K , N ) ( 1d ) K
=
+
N
N
N
k ' ( 1+ n )=szf ( k ) + ( 1d ) k
k=

szf ( k ) ( 1d ) k
+
1+ n
1+n

k'=

0.1 k
0.92 k
+
1.02
1.02

'

0.4

Capital per capita evolves over time according the formula in bold above
based on the assumptions that z=1,s=0.1,n=0.02, and d=0.08, eventually
resulting in a steady state.
i.

See excel sheet

ii.

See excel sheet

iii.

Yes there is a tendency for convergence. The initial difference in capital per
worker is 1, however at period 100 the difference is less than 0.0024. This
suggests that in the long run, if z, n, d and s are the same for rich and poor
countries, they will eventually end up with the same capita per worker.

iv.

szf ( k )=( n+ d ) k
k =1

0.11f ( k )=( 0.02+0.08 ) k

0.1 f ( k ) =0.1 k

0.4

0.1 k =0.1 k

Name: Quan Hao

v.
vi.

szf ( k )=( n+d ) k

Student Number:250721755

0.31f ( k ) =0.1 k

Econ Assignment #4

0.4

0.3 k =0.1 k
0.4

k =6.24 c=( 1s ) zf ( k )=( 10.3 )16.24 =1.456


Consumption has increased. The increase in the savings rate is improving.