Chapter 2

Question 1

what is the natural level of unemployment?

Answer 1

the long run equilibrium rate of unemployment

Question 2

how do we determine the natural (LR equilibrium) level of production?

Answer 2

Yn = F(K, Nn) = F(K,E (1-Un) L

Question 3

what 4 factors does LR natural production level depend on?

Answer 3

stock of capital (K)
size of labour force (L)
the natural rate of unemployment (Un)
The technology (E)

Question 4

what is the production function? what are the 3 properties we assume it has?

Answer 4

Y = F(K,EN)
1. marginal products are positive
2. marginal products are decreasing
3. constant returns to scale

Question 5

what is the cobb douglas production function?

Answer 5

Yn = K^a (EN)^1-a
a between 0 and 1

Question 6

how do we calculate MPK and MPL? How does an increase in capital or labour affect them?

Answer 6

MPK = derivative w.r.t K
MPL = w.r.t L

MPK = ak^a-1 (EN) ^1-a
MPL + (1-a) E^1-a (K/N)^a

when L goes up MPK goes up
improved tech causes MPK to go up
increased capital input leads to MPK down

Question 7

using the cobb douglas MPL = (1-a) Y/N how do we see that price is proportional to the unit labour cost WN/Y?

Answer 7

P = 1+ markup (u)/ (1 - a) x WN/Y

Question 8

how do we calculate labour share of income? what makes the share higher or lower?

Answer 8

WN/PY = 1-a/ (1+ markup(u))

the more important capital is the lower the labour share
less competition in product market = higher markup and a lower labour share. High income 2/3

Question 9

how do we calculate real wage?

Answer 9

real wage = nominal wage/price level

MPL/ (1+ markup (u)) = W/P

Question 10

how is price elasticity of demand calculated?

Answer 10

Yi = d(Pi/P) Y
n = dYi/Yi / Dpi/pi
= Dyi/dPi Pi/Yi

Question 11

What do firms do in a monopolistically competitive market? how do they maximise profits?

Answer 11

produce differentiated goods and face limited demand
cannot sell any amount they want at a given price
downward sloping demand - tradeoff between price and quantity
produces where MR = MC setting a price with markup over MC

Question 12

how do we calculate MC? What is the equation for the economy’s price level?

Answer 12

MC = W/MPL

P = (1+ u)MC
= (1+ u) W/MPL

Question 13

what does the price level depend on?

Answer 13

markup
wage
MPL

Question 14

what does MPL depend on?

Answer 14

Technology
amount of capital per worker