XYZ Co operates in a competitive market. Its production function is q = L?K?. The exponents, ? and ?, are both less than 1. The firm's capital is fixed, and it takes the wage and price as given
Derive the firm's short-run demand for labor as a function of K, w, and p. How does the firm react to an increase in the wage rate?
MPL = ?L?-1K?. The firm sets w = p(?L?-1K?). Rearranging to solve for L yields L = (w/p?K?)1/(?-1). Since a < 1, L increases when p and K increase, and decreases when w increases.
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Consider a game in which all outcomes give the players the same total payoff. Explain why every outcome in such a game will be Pareto optimal.
What will be an ideal response?
If the number of unemployed workers in an economy is 4 million, and the size of the labor force in the economy is 16 million, the unemployment rate in the economy is:
A) 8 percent. B) 4 percent. C) 30 percent. D) 25 percent.
The bias in the CPI distorts private contracts because
A) a future payment that is linked to the CPI is likely to be raised above the true increase in the price level. B) a worker that links her salary to the CPI is likely to be worse off than a worker that doesn't link her salary to the CPI. C) a lender that links the interest payments on the loan to the CPI is likely to be worse off than a lender that does not link the interest payments on the loan to the CPI. D) a future increase in a payment that is linked to the CPI is likely to be less than the true increase in the price level. E) the CPI cannot properly account for what goods and services a typical urban consumer buys.
Economic theory
a. expresses normative values b. invents imaginative and interesting stories c. predicts the behavior of a specific economic decision maker after an economic change d. predicts the average behavior of a group of similar economic decision makers after an economic change e. uses only perfect and complete information