Question 4: Consider a variant of the two-period real intertemporal model. The pro- duction function is Y = zN. There is no capital in this economy (K = K' = 0) nor do the firms make any investment (I = 0). Describe and illustrate the equilibrium effects of a temporary increase in current total factor productivity (z) on this economy using the four figures diagram that includes the labour market, the production function, the demand for current goods diagram, and the goods market. 1. What is the marginal product of labour? 2. Illustrate the four figures diagram. What happens to the labour demand and supply curves? How does the real wage change?

Question 4: Consider a variant of the two-period real intertemporal model. The pro- duction function is Y = zN. There is no capital in this economy (K = K' = 0) nor do the firms make any investment (I = 0). Describe and illustrate the equilibrium effects of a temporary increase in current total factor productivity (z) on this economy using the four figures diagram that includes the labour market, the production function, the demand for current goods diagram, and the goods market. 1. What is the marginal product of labour? 2. Illustrate the four figures diagram. What happens to the labour demand and supply curves? How does the real wage change?

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Chapter1: Making Economics Decisions

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