ECON 364
Homework Assignment Two – (29 pts.)

DUE THURSDAY, JAN. 27 at the beginning of class.

Note:  Keep a copy of your answers for yourself -- since I will not be able to hand this back to you before the exam.  We will go over the answers on Thursday, 27th after you have turned in the homework.

READ:  Copy and paste this page into a word document and then type your answers or type them on another sheet of paper.   If you turn in another sheet of paper it MUST BE STAPLED to this sheet.  Graphs can be hand drawn.

Name:

1.  Write the short run production function of the Classical model.  Explain each of the "variables" and/or "factors" in the function (that is, what factors contribute to productivity in the Classical model).  Draw the function.  What would cause the function to "shift" upward and why?   (10 pts.)

2. Since short run productivity is driven by changes in the amount of labor employed in the Classical model, determining the amount of labor employed is important.

a.  Assume a firm is employing 100 people.  The marginal product of the 100th worker is 7 units of output (good X) per hour.  The nominal wage of all workers for this firm is $16 per hour.   Good X is sold to consumers for $4.00 per unit.  When the firm hires the 101st person, the marginal product drops to 5 units.  Should the firm hire this marginal worker?  Explain your answer.  (5 pts.)

b.  Draw the demand for labor curve -- which is also what curve? (3 pts.)

c.  Explain the substitution and income effects with respect to the supply of labor.  Which effect does the Classical model assume to dominate? (5 pts.)

d.  Draw the labor supply curve, given this assumption. (2 pts.)

3.  With respect to the two models you have just discussed -- graphically show their relationship.   That is, draw one graph on top of the other and show how the amount of employment in the economy relates to a certain amount of output in the economy.  (4 pts.)