Question 1

Consider an economy with the production function Y  = L(1 / 3)

a) Derive the Labor demand Curve

b) If Labor supply curve is wage, labor and output.

Ls   = (w / p) , calculate the equilibrium levels of real

c) Assume M s = 45 and k = 3 . What is the equation of the aggregate demand curve for this example? What is the price level? What is the nominal wage level?

d) Show equilibrium in labor market / output market / money market by using the graphical analysis of "The Complete Theory of Aggregate Demand and Supply"

Question 2

Consider an economy where, consumer's utility function is given as U(C,L)=C-(1/2)L2 . where C is consumption and L is labor. The production technology is Y=(1.6)L-(1/2)L2. The turnover cost per labor is (0.36)/(w/p)

(a) What happens to t as real wage increases? Give a clear intuition

(b) What happens to t as labor increases? Give a clear intuition

(c) Write down the firm's maximization problem and solve it. Find real wage, labor.

(d) Write down consumer maximization problem and solve it. Derive labor supply curve

(e) Find real wage, employment, output and unemployment in this economy.

(f) Illustrate the solution graphically using Labor Supply / Labor Demand and Production Function diagrams.