Principles of Economics, 7th Edition (MindTap Course List)
7th Edition
ISBN: 9781285165875
Author: N. Gregory Mankiw
Publisher: Cengage Learning
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Chapter 20, Problem 2QR
To determine
The change in income earned by the richest fifth of the US economy.
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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
capital the firm should use.
[3 marks]
(b) Referring to your result from part (a), comment on what happens to K* when
each of the following variables change (holding other variables constant),
(i)
The measure of technology (A) falls
(ii)
The depreciation rate (8) increases
(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 20 Solutions
Principles of Economics, 7th Edition (MindTap Course List)
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