Tharikha Arun

Assignment 2
Professor Debasis Rooj
9th Septemper, 2016
1.The following data give real GDP, Y, capital, K, and labor, N, for the U.S. economy
in various years.
Year Y
K
N
1960 3109 3883 66
1970 4722 5863 79
1980 6450 8433 99
1990 8955 11,460 119
2000 12,560 15,402 137
2010 14,784 18,513 139
Units and sources are the same as in Table 3.1.
Assume that the production function is Y=AK^0.3N^0.7. By what percentage did
U.S. total factor productivity grow between 1960 and 1970? Between 1970 and
1980? Between 1980 and 1990? Between 1990 and 2000? Between 2000 and 2010?
What happened to the marginal product of labor between 1960 and 2010? Calculate
the marginal product numerically as the extra output gained by adding 1 million
workers in each of the two years. (The data for employment, N, are measured in
millions of workers, so an increase of 1 million workers is an increase of 1.0.)
Ans 1.
Year
1960
1970

Y
3109
4722

1980
1990

6450
8955

2000

12,560

K
3883
5863
8433
11,46
0
15,40
2
18,51
3

N
66
79
99
119
137

K^0.3
11.93302
13.50318
2010 14,784
139
15.05895
16.51032
18.04152
In order to check chane in MPN
19.66527
from 1960 to 2010, take N+1 to be the new N
New Y
3141.90
4763.76

MPN
32.90
41.76

N^0.7
18.77936
21.29801
24.94277
28.37154
31.31154
31.63081
value:

A
13.87362
16.41916
17.17198
19.11733
22.23372
24.51538

% Change
18.3481
4.584999
11.32863
16.30136
10.26215

6495.54
9007.61
12624.11
14858.37

45.54
52.61
64.11
74.37

Therefore, MPN changed from 32.90 to 74.37 between 1960 and 2010.
5. Consider an economy in which the marginal product of labor MPN is
MPN=30952N, where N is the amount of labor used. The amount of labor supplied,
NS, is given by NS=22+12w+2T, where w is the real wage and T is a lump-sum tax
levied on individuals. Use the concepts of income effect and substitution effect to
explain why an increase in lump-sum taxes will increase the amount of labor
supplied. Suppose that T=35. What are the equilibrium values of employment and
the real wage? With T remaining equal to 35, the government passes minimum
wage legislation that requires firms to pay a real wage greater than or equal to 7.
What are the resulting values of employment and the real wage?
Ans 5.
MPN = 3095 2N = W (real wage)
NS = 22+12w+2T
NS = 22+12(3095 2N) +2T
NS = 22 + 37140 24N + 2T
At T = 35
NS = 22 + 37140 24N +2(35)
NS = 37232 24N
N = NS in the Equilibrium labour market
37232 = 25N
N = 1489.28
W = 3095 2 (1489.28)
W = 116.44
If a lump sum tax is increased, there will be direct income effect and not a
substitution
effect. Increased tax will reduce labours wealth and so the labour supply increases.

If sales tax is increased in lump-sum, it will lead to a direct effect on the income and
not on the substitution effect. Labour supply will then increase because of the
increase in tax will lead to a reduction in wealth. Hence, The equilibrium
employment is 1489.28 and wage is 116.44.
At T = 35, and minimum real wage of 7 or greater
W = 3095 2N
3088 = 2N
N = 1544
NS = 22 + 12W + 2(35)
NS = 92 + 12 (7)
NS = 176
Therefore, at a real wage of 7, there is excess demand by 1368.

7. Consider an economy with 500 people in the labor force. At the beginning of
every month, 5 people lose their jobs and remain unemployed for exactly one
month; one month later, they find new jobs and become employed. In addition, on
January 1 of each year, 20 people lose their jobs and remain unemployed for six
months before finding new jobs. Finally, on July 1 of each year, 20 people lose their
jobs and remain unemployed for six months before finding new jobs. What is the
unemployment rate in this economy in a typical month? What fraction of
unemployment spells lasts for one month? What fraction lasts for six months? What
is the average duration of a completed spell of unemployment? On any particular
date, what fraction of the unemployed are suffering a long spell (six months) of
unemployment?
Ans 7.
Labour Force = 500 people
Number of Unemployed people every month = 5
Nnumber of unemployed people every 6 months = 20
Therefore, 25 people are unemployed every month.
Unemployment rate = Total number of spells during the year
=(5 12)+ (20 2)

Threfore, 60 + 40 = 100; where, 60% of spells last for one month and 40% of spells
last for 6 months.
Average duration of completed spell of unemployment: (0.6 1 * one month)+ (0.46 *
6 months) = 3 months
At any particular time, there are 25 people unemployed.
20 People unemployed for 6 months, suffer a longer spell.
(20/25)100 = 80%
80% of unemployed suffer a longer spell
Analytical Problems:

2.How would each of the following affect the current level of full-employment
output? Explain.
a)A large number of immigrants enter the country.
b) Energy supplies become depleted.
c)New teaching techniques improve the educational performance of high school
seniors.
d) A new law mandates the shutdown of some unsafe forms of capital.
Ans 2.
Full employment output is a term used to describe an economy that is operating
with an ideal and efficient level of employment, where economic output is at its
highest potential. When the economy is at full employment, aggregate demand is
equal to aggregate supply.
a) If a large number of immigrants were to enter a country, the number of
people looking for employment will go up which means that the supply of
labour will exceed the demand leading to a surplus of labour which in turn will
lead to an increase in output as well.
b) Because enrgy is a factor of production, a depletion in energy supplies will
automatically lead to a reduction in current full-employment output.
c) Although new teaching techniques will improve the educational performance
of high-school seniors, they are still students in school and therefore have no
contribution towards current level of output. Hence, the current level of fullemployment output remains unchanged.
d) Capital is again a factor of production and with the shutdown of capital, there
will be a direct decrease in the current full-employment output.

4. How would each of the following affect Helena Handbaskets supply of labor? The
value of Helenas home triples in an unexpectedly hot real estate market. Originally
an unskilled worker, Helena acquires skills that give her access to a higher-paying
job. Assume that her preferences about leisure are not affected by the change in
jobs. A temporary income tax surcharge raises the percentage of her income that
she must pay in taxes, for the current year only. (Taxes are proportional to income in
Helenas country.)
Ans 4.
1. If the value of Helenas home tripples, it means that there is an increase in
her wealth. This would result to an income effect where her desire to work
would reduce thereby reducing her supply of labour.
2. If Helena acquired new skills that give her access to a higher paying job, then
there is an increase in her real wage. Income effect comes into play and
should reduces her supply due to her increase in real wage. However, she is
not working longer hours to earn this increase in real wage, hence, her supply
of labour does not change.
3. If the percentage of income that she has to pay as tax increases for the
current year only, there would be only a temorary change in her real wage
and hence will reduce her current labour supply temporarily.