1. Suppose the production function is zF(K, N) = ZKªN!a and zF(K', N') = 2K°N-a. (a) Set up the firms problem. (b) Show that labor demand curve is downward sloping (c) Show that investment demand is decreasing in interest rate. 2. Use the Keynesian cross to derive the AD curve. Show it is decreasing in r. 3. Use the labor market clearing condition to derive the AS curve. Show it is increasing in r.

1. Suppose the production function is zF(K, N) = ZKªN!a and zF(K', N') = 2K°N-a. (a) Set up the firms problem. (b) Show that labor demand curve is downward sloping (c) Show that investment demand is decreasing in interest rate. 2. Use the Keynesian cross to derive the AD curve. Show it is decreasing in r. 3. Use the labor market clearing condition to derive the AS curve. Show it is increasing in r.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Concept explainers

Comparative Advantage and Absolute Advantage Analysis

The theory of absolute advantage was given by Adam Smith in the year 1776.

Question

1. Suppose the production function is zF(K, N) = 2KªN]« and z F(K', N') = 2KªNI-a.
(a) Set up the firms problem.
(b) Show that labor demand curve is downward sloping
(c) Show that investment demand is decreasing in interest rate.
2. Use the Keynesian cross to derive the AD curve. Show it is decreasing in r.
3. Use the labor market clearing condition to derive the AS curve. Show it is increasing in r.

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