Q: Suppose the government introduces a proportional tax $$\tau on $$output in the one-period model with production function $$Y = ZK$$^{\alpha}$$N^{1-\alpha}. $$The firm's after-tax profit is $$\Pi = (1-\tau)Y - wN$. The profit-maximizing condition is:

$$(1-\tau)\frac{\partial Y}{\partial N} = w$$

Question 1

Which of the following best describes how what is produced and consumed in an economy is determined in the long run?

Accepted Answer

By the preferences of consumers and by the available technology

Question 2

Improvements in a country's standard of living are brought about in the long run primarily by:

Accepted Answer

Increases in productivity

Question 3

Suppose in 2021, Canadian GDP was $$2 trillion and consumption was 1.2 $$trillion. What fraction of GDP did consumption represent?

Accepted Answer

$$\frac{1.2}{2} = 0.6$$

Question 4

Labour market tightness reflects the degree of difficulty that:

Accepted Answer

Firms have in finding workers

Question 5

Which of the following variables is typically procyclical and more variable than GDP over the business cycle?

Accepted Answer

Investment

Question 6

Is employment generally considered a lagging, leading, or coincident variable with respect to GDP?

Accepted Answer

Coincident

Question 7

Suppose the real wage rate increases. According to the substitution and income effects, what happens to the consumer's optimal consumption choice when taxes and dividend income remain constant?

Accepted Answer

The change is ambiguous due to opposing income and substitution effects

Question 8

Suppose a consumer can earn a higher wage rate for working 'overtime.' For the first $$h$$ hours, the wage rate is $$w$$, and for hours above $$h$$, the wage rate is $$w' \u003e w. $$What is the slope of the budget constraint for hours above $$h$$?

Accepted Answer

$$-w'$$

Question 9

If the government introduces new regulations that reduce the efficiency of a firm's production process, which way does the firm's labour demand curve shift?

Accepted Answer

Shifts left

Question 10

Consider the production function $$Y = K$$^{0.5}$$N^{0.5}$$, where $$N is $$labour input. If a natural disaster destroys part of the capital stock $$K$, what happens to the firm's labour demand curve?

Accepted Answer

It shifts left

Question 11

Suppose the government introduces a proportional tax $$	au on $$output in the one-period model with production function $$Y = ZK$$^{\alpha}$$N^{1-\alpha}. $$The firm's after-tax profit is $$\Pi = (1-	au)Y - wN$. The profit-maximizing condition is:

Accepted Answer

$$(1-	au)\frac{\partial Y}{\partial N} = w$$

Question 12

If the marginal rate of substitution (MRS) between leisure and consumption is $$MRS = C/L$$, and the real wage is $$w = 2$$, which bundle will a utility-maximizing consumer choose?

Accepted Answer

The bundle where $$C = 28$$ and $$L = 14$$

Question 13

Suppose the budget constraint is $$C = w(h - l) + T. If $$dividend income $$r$$ decreases, what happens to the budget constraint and optimal labour supply?

Accepted Answer

The budget constraint shifts in (no change in slope) and labour supply decreases

Question 14

In Figure 2, the distance AB represents:

Accepted Answer

Variable Costs

Question 15

If the time series of 'other variable' in Figure 1 moves in the same direction as GDP and is more volatile, the variable is:

Accepted Answer

Procyclical and more variable than GDP

Question 16

Suppose the government increases the tax rate from $$	au = 0 to$$ $$	au = 0.5 in $$the one-period model with $$Y = ZK$$^{\alpha}$$N^{1-\alpha}$. What happens to the firm's labour demand curve?

Accepted Answer

It shifts left

Question 17

Suppose $$	au = 0.5$$, $$\alpha = 0.5$$, $$Z = 2$$, $$w = 5$$, and $$K = 900 in $$the one-period model. What is the value of $$N^*$$ that maximizes profits?

Accepted Answer

$$N^* = 16$$

Question 18

Which of the following is NOT a component of GDP in the expenditure approach?

Accepted Answer

Transfer payments

Question 19

If average labour productivity is procyclical, what does this mean?

Accepted Answer

It increases during economic expansions and decreases during recessions

Intermediate Macroeconomics I: Study Notes on Measurement, Labour Supply, and Production

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