Q: Suppose the consumer's budget constraint is $$C = wN^* - tN^* + \\pi - T. If$$ $$w = 20$$, $$t = 2$$, $$N^* = 920.75$$, $$\\pi = 2000$$, and $$T = 0$$, what is the consumer's optimal consumption $$C$$?

$$C = 20 \\times 920.75 - 2 \\times 920.75 + 2000 = 18 \\times 920.75 + 2000 = 16,573.5 + 2000 = 18,573.5$$

Q: Given the firm's marginal product of labor $$MP_N = (1-\\alpha)A K$$^{1-\\alpha}$$ N$$^{-\\alpha}$$, profit maximization implies w = MP_N$. If A = 2$, K = 100$, $$\\alpha = 0.3$$, and N = 50$, what is the equilibrium wage w$?

$$w = (1-0.3) \\times 2 \\times 100$$^{0.7}$$ \\times 50$$^{-0.3}$$

Q: Given the Cobb-Douglas production function $$Y = ZK^a N$$^{1-a}$$, if a = 0.3$, Z = 2$, K = 100$, and N = 50$, what is the output Y$?

$$Y = 2 \\times 100$$^{0.3}$$ \\times 50$$^{0.7}$$

Q: If the government increases $$T ($$lump-sum taxes), what is the likely effect on the consumer's optimal consumption $$C$$ and leisure $$\\ell$$, holding all else constant?

$$C$$ decreases and $$\\ell$$ decreases.

Question 1

Suppose the representative consumer has the utility function $$U(C, \ell) = \frac{C$$^{1-a}$$}{1-a} + \theta \frac{\$$ell^{1-b}$$}{1-b}$$, with $$0 \u003c a \u003c 1$$ and $$0 \u003c b \u003c 1. $$What does the parameter $$\theta$$ represent in this utility function?

Accepted Answer

The consumer's relative preference for leisure compared to consumption.

Question 2

Given the marginal rate of substitution formula $$MRS_{\ell, C} = \theta \left(\frac{C}{\ell}\$$right)^{a-b}$$, what does this expression represent in the context of consumer optimization?

Accepted Answer

The rate at which the consumer is willing to trade leisure for consumption while maintaining the same utility.

Question 3

A consumer faces the time constraint $$N^* + \ell = h. If$$ $$h = 1456$$ and optimal leisure is $$\ell^* = 535.25$$, what is the optimal labor supply $$N^*$$?

Accepted Answer

$$N^* = 920.75$$

Question 4

Suppose the consumer's budget constraint is $$C = wN^* - tN^* + \pi - T. If$$ $$w = 20$$, $$t = 2$$, $$N^* = 920.75$$, $$\pi = 2000$$, and $$T = 0$$, what is the consumer's optimal consumption $$C$$?

Accepted Answer

$$C = 20 \times 920.75 - 2 \times 920.75 + 2000 = 18 \times 920.75 + 2000 = 16,573.5 + 2000 = 18,573.5$$

Question 5

The firm's production function is $$Y = A K$$^{1-\alpha}$$ N$$^{\alpha}$$, with 0$$ \u003c \alpha \u003c 1$$. What does $$\alpha$$ represent in this context?

Accepted Answer

The output elasticity with respect to labor.

Question 6

Given the firm's marginal product of labor $$MP_N = (1-\alpha)A K$$^{1-\alpha}$$ N$$^{-\alpha}$$, profit maximization implies w = MP_N$. If A = 2$, K = 100$, $$\alpha = 0.3$$, and N = 50$, what is the equilibrium wage w$?

Accepted Answer

$$w = (1-0.3) \times 2 \times 100$$^{0.7}$$ \times 50$$^{-0.3}$$

Question 7

If the production possibilities frontier (PPF) is given by $$C = ZK^a (h - \ell)^a - G$$, what does the term $$(h - \ell)$$ represent?

Accepted Answer

The total labor supplied to the market.

Question 8

In the context of the competitive equilibrium, which condition must hold at the optimal bundle on the PPF?

Accepted Answer

The marginal rate of transformation (MRT) equals the marginal rate of substitution (MRS): $$MRT = MRS$$

Question 9

Suppose the consumer's demand for leisure is given by $$\ell = \frac{\$$theta^{1/b}$$ (w + \pi - T)}{w + \$$theta^{1/b}$$}. If$$ $$\theta$$ increases, what happens to the consumer's leisure demand, all else equal?

Accepted Answer

Leisure demand increases.

Question 10

If the firm's labor demand is given by $$N^* = \left[\frac{(1-\$$alpha)ZK^{1-\alpha}$$}{w}\right]^{1/\alpha}$$, what happens to $$N^* if $$the wage $$w$$ increases, holding all else constant?

Accepted Answer

$$N^*$$ decreases.

Question 11

Given the Cobb-Douglas production function $$Y = ZK^a N$$^{1-a}$$, if a = 0.3$, Z = 2$, K = 100$, and N = 50$, what is the output Y$?

Accepted Answer

$$Y = 2 \times 100$$^{0.3}$$ \times 50$$^{0.7}$$

Question 12

If the government increases $$T ($$lump-sum taxes), what is the likely effect on the consumer's optimal consumption $$C$$ and leisure $$\ell$$, holding all else constant?

Accepted Answer

$$C$$ decreases and $$\ell$$ decreases.

Question 13

Suppose the equilibrium wage is determined by $$w^* = (1-\$$alpha)ZK^{1-\alpha}$$/N^{*\alpha}. If$$ $$K$$ increases, what happens to $$w^*$, all else equal?

Accepted Answer

$$w^*$$ increases.

Question 14

In the numerical example, the optimal bundle is found where the indifference curve is tangent to the PPF. What does this tangency condition represent?

Accepted Answer

The consumer's marginal rate of substitution equals the marginal rate of transformation.

Question 15

If the consumer's utility maximization problem is subject to the constraint $$C = w(h - \ell) + \pi - T$$, what does $$h - \ell$$ represent?

Accepted Answer

The number of hours worked (labor supplied).

Question 16

Suppose the government increases $$G ($$government spending) in the PPF $$C = ZK^a (h - \ell)^a - G. $$What is the immediate effect on the feasible set for the consumer?

Accepted Answer

The feasible set for consumption $$C$$ shrinks.

Question 17

If the consumer's optimal choice is to maximize $$U(C, \ell)$$ subject to the budget constraint, which of the following is NOT a necessary condition for an interior solution?

Accepted Answer

The marginal utility of consumption is zero.

Question 18

In the context of the model, what is the economic interpretation of the firm's profit $$\pi = Y^* - w^* N^*$$?

Accepted Answer

The difference between total output and total wage payments to labor.

Question 19

If the marginal rate of substitution $$MRS_{\ell, C} is $$greater than the wage $$w$$, what should the consumer do to increase utility?

Accepted Answer

Increase leisure and decrease labor supply.

Consumer and Firm Optimization, and Competitive Equilibrium with the PPF

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