ECON: MICRO4 (New, Engaging Titles from 4LTR Press)
4th Edition
ISBN: 9781285423548
Author: William A. McEachern
Publisher: Cengage Learning
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Chapter 13, Problem 1.2PA
To determine
To find:
The marginal cost of investing in the firm when we are given the expected
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A firm faces the following production function,
Y = AKα L¹-a
(1)
Here Y is output, K is capital, L is fixed labour, and A is a measure of technology.
The firm uses an optimal amount of capital determined by the condition,
MPK = r +8
(2)
Where MPK is the marginal productivity of capital, r is the real interest rate, and ♪ is
the depreciation rate.
(a) Using equations (1) and (2) find an expression for K*, the optimal amount of
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[3 marks]
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each of the following variables change (holding other variables constant),
(i)
The measure of technology (A) falls
(ii)
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(iii)
The real interest rate (r) increases
[2 marks]
[2 marks]
[2 marks]
[Hint: For each of parts (i)-(iii) you are being asked to comment on what happens to
K* if just the variable mentioned in the question part changes. Your answer should
state whether K* increases, decreases, or stays the…
In the week-4 materials, when deriving labour supply, we assumed that the
substitution effect dominated the income effect. What impact would there be on
labour supply if this was not the case? Briefly investigate how such a change could
theoretically affect the imposition of a minimum wage above the market clearing
wage. (Your answer is likely to benefit from diagrammatic support.)
Refer to the attached Wk 3 Graph for this assignment. The graph shows an increase in demand (shifting of the demand curve from D1 to D2). Choose an application or situation in the economy or a specific economic situation to describe this graph. Take into consideration the impact on quantity and price in your analysis.
Given your analysis, what would cause the situation to go the opposite way? What would cause the situation to go further into the same direction?
Chapter 13 Solutions
ECON: MICRO4 (New, Engaging Titles from 4LTR Press)
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