For example, the economy of a country can be explained by several models as follows: Consumer: The consumer derives his satisfaction from his current consumption, future consumption and his free time (u(C,C',l,l'). He maximizes his utility by: C+wl+11+rC'+w'1+rl'=wh+π-T+w'h+'-T'1+r It is assumed that consumer preferences meet the general conditions that are often used (more is better, preference for diversity, all goods are normal, substitution effect is more dominant). Firm: In the first period, the firm has K capital and employs N workers to produce Y output: Y outputs: Y=zF(K,N) The profit in the first period is =Y-wN-I Where I is the company's investment. Investments increase the capital stock for the second period: K'=1-dK+I In the second period the firm will produce output of Y': Y'=z'F(K',N') Then the profits obtained in the second period are: '=Y'-w'N' Firms choose the demand for labor (N, N') and the demand for investment I to maximize their value: V=π+π'1-r Government: The government earns taxes T and T' to finance a level of government exogenous spending i.e. G and G'. International Trade: No international trade Equilibrium: the balance of the economy can be written by the following formula: Y=C+I+GY'=C'+G'N=h-lN'=h-l' Suppose it seems likely that a new invention will lead to a large increase in productivity in the next few years. Consumers and companies believe that TFP (Total Factor Productivity) will increase (z' > z). But in fact that belief is wrong and TFP does not increase (z' = z). Determine the effect (up, down, or no change) of this false belief on each of the following: Current consumption (C) Current investment (I) Current labor input (N) Current real wage (w) Current output (Y) Current interest rate (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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For example, the economy of a country can be explained by several models as follows: Consumer: The consumer derives his satisfaction from his current consumption, future consumption and his free time (u(C,C',l,l'). He maximizes his utility by: C+wl+11+rC'+w'1+rl'=wh+π-T+w'h+'-T'1+r It is assumed that consumer preferences meet the general conditions that are often used (more is better, preference for diversity, all goods are normal, substitution effect is more dominant). Firm: In the first period, the firm has K capital and employs N workers to produce Y output: Y outputs: Y=zF(K,N) The profit in the first period is =Y-wN-I Where I is the company's investment. Investments increase the capital stock for the second period: K'=1-dK+I In the second period the firm will produce output of Y': Y'=z'F(K',N') Then the profits obtained in the second period are: '=Y'-w'N' Firms choose the demand for labor (N, N') and the demand for investment I to maximize their value: V=π+π'1-r Government: The government earns taxes T and T' to finance a level of government exogenous spending i.e. G and G'. International Trade: No international trade Equilibrium: the balance of the economy can be written by the following formula: Y=C+I+GY'=C'+G'N=h-lN'=h-l' Suppose it seems likely that a new invention will lead to a large increase in productivity in the next few years. Consumers and companies believe that TFP (Total Factor Productivity) will increase (z' > z). But in fact that belief is wrong and TFP does not increase (z' = z). Determine the effect (up, down, or no change) of this false belief on each of the following: Current consumption (C) Current investment (I) Current labor input (N) Current real wage (w) Current output (Y) Current interest rate (r)

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