1. Consider an economy where the production function takes the form Y = z(N + K), where N is labor and K is capital. K is exogenous and fixed at the level Ko: K = Ko. The total time endowment of the consumer in this economy is h, so N + 1 = h, where is leisure. The consumer has preferences over consumption and leisure that can be represented by convex indifference curves. The government in this economy has spending/consumption G, fixed exogenously. Assume that zKo > G. Also assume that the first welfare theorem holds for this economy. 1) On the graph draw the PPF (aggregate resource constraint) for this econ- omy. Make sure to label axes and the points of intersection of PPF with both axes. If the PPF has a kink you should clearly mark the x- and y-coordinates of the kink. (Recall, leisure should be on the horizon axis and consumption on the vertical axis). On the same graph show where is the competitive equilibrium for this economy (denote it A). 2) Assume now that the total factor productivity increases to the new level Znew. On the same graph, draw the new PPF for this economy. Make sure to label the points of the intersection of the new PPF with both axes. If the new PPF has a kink you should clearly mark the x- and y-coordinates of the kink. On the same graph, show where is the new competitive equilibrium for this economy (denote it B). What will happen to the consumption in the new equilibrium (increases/decreases)? Provide intuition. 3) Reproduce the original graph from part 1) of the problem. Make sure to place point A (competitive equilibrium) on the graph. Assume now that the government consumption G increases to the new level Gnew. Assume that zKo Gnew. On the same graph, draw the new PPF for this economy. Make sure to label the points of the intersection of the new PPF with both axes. If the new PPF has a kink you should clearly mark the x- and y-coordinates of the kink. On the same graph show where is the new competitive equilibrium for this economy (denote it D). What will happen to the consumption in the new equilibrium (increases/decreases)? Provide intuition.
1. Consider an economy where the production function takes the form Y = z(N + K), where N is labor and K is capital. K is exogenous and fixed at the level Ko: K = Ko. The total time endowment of the consumer in this economy is h, so N + 1 = h, where is leisure. The consumer has preferences over consumption and leisure that can be represented by convex indifference curves. The government in this economy has spending/consumption G, fixed exogenously. Assume that zKo > G. Also assume that the first welfare theorem holds for this economy. 1) On the graph draw the PPF (aggregate resource constraint) for this econ- omy. Make sure to label axes and the points of intersection of PPF with both axes. If the PPF has a kink you should clearly mark the x- and y-coordinates of the kink. (Recall, leisure should be on the horizon axis and consumption on the vertical axis). On the same graph show where is the competitive equilibrium for this economy (denote it A). 2) Assume now that the total factor productivity increases to the new level Znew. On the same graph, draw the new PPF for this economy. Make sure to label the points of the intersection of the new PPF with both axes. If the new PPF has a kink you should clearly mark the x- and y-coordinates of the kink. On the same graph, show where is the new competitive equilibrium for this economy (denote it B). What will happen to the consumption in the new equilibrium (increases/decreases)? Provide intuition. 3) Reproduce the original graph from part 1) of the problem. Make sure to place point A (competitive equilibrium) on the graph. Assume now that the government consumption G increases to the new level Gnew. Assume that zKo Gnew. On the same graph, draw the new PPF for this economy. Make sure to label the points of the intersection of the new PPF with both axes. If the new PPF has a kink you should clearly mark the x- and y-coordinates of the kink. On the same graph show where is the new competitive equilibrium for this economy (denote it D). What will happen to the consumption in the new equilibrium (increases/decreases)? Provide intuition.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:1. Consider an economy where the production function takes the form Y =
z(N + K), where N is labor and K is capital. K is exogenous and fixed at
the level Ko: K = Ko. The total time endowment of the consumer in this
economy is h, so N + 1 = h, where is leisure. The consumer has preferences
over consumption and leisure that can be represented by convex indifference
curves. The government in this economy has spending/consumption G, fixed
exogenously. Assume that zK₁ > G. Also assume that the first welfare theorem
holds for this economy.
1) On the graph draw the PPF (aggregate resource constraint) for this econ-
omy. Make sure to label axes and the points of intersection of PPF with both
axes. If the PPF has a kink you should clearly mark the x- and y-coordinates of
the kink. (Recall, leisure should be on the horizon axis and consumption on the
vertical axis). On the same graph show where is the competitive equilibrium
for this economy (denote it A).
2) Assume now that the total factor productivity increases to the new level
Znew. On the same graph, draw the new PPF for this economy. Make sure
to label the points of the intersection of the new PPF with both axes. If the
new PPF has a kink you should clearly mark the x- and y-coordinates of the
kink. On the same graph, show where is the new competitive equilibrium for
this economy (denote it B). What will happen to the consumption in the new
equilibrium (increases/decreases)? Provide intuition.
3) Reproduce the original graph from part 1) of the problem. Make sure
to place point A (competitive equilibrium) on the graph. Assume now that
the government consumption G increases to the new level Gnew. Assume that
zKo Gnew. On the same graph, draw the new PPF for this economy. Make
sure to label the points of the intersection of the new PPF with both axes. If
the new PPF has a kink you should clearly mark the x- and y-coordinates of
the kink. On the same graph show where is the new competitive equilibrium
for this economy (denote it D). What will happen to the consumption in the
new equilibrium (increases/decreases)? Provide intuition.
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