Unit 1 Answers to Recommended End-of-Chapter-Problems

Chapter 1 Review Questions

1. Both total output and output per worker have risen strongly over time in the United
States. Output itself has grown by a factor of 100 in the last 133 years. Output per worker
is now six times as great as it was in 1900. These changes have led to a much higher
standard of living today.
2. The business cycle refers to the short-run movements (expansions and recessions) of
economic activity. The unemployment rate rises in recessions and declines in expansions.
The unemployment rate never reaches zero, even at the peak of an expansion.
3. A period of inflation is one in which prices (on average) are rising over time. Deflation
occurs when prices are falling on average over time. Before World War II, prices tended
to rise during war periods and fall after the wars ended; over the long run, the price level
remained fairly constant. Since World War II, however, prices have risen fairly steadily.
4. The budget deficit is the annual excess of government spending over tax collections.
The U.S. federal government has been most likely to run deficits during wars. From the
early 1980s to the mid-1990s, deficits were very large, even without a major war. The
U.S. government ran surpluses for several years, from 1998 to 2001.
5. The trade deficit is the amount by which imports exceed exports; the trade surplus is
the amount by which exports exceed imports, so it is the negative of the trade deficit. In
recent years the United States has had huge trade deficits. But from 1900 to 1970, the
United States mostly had trade surpluses.
7. The steps in developing and testing an economic model or theory are: (1) state the
research question; (2) make provisional assumptions that describe the economic setting and
the behavior of the economic actors; (3) work out the implications of the theory; (4)
conduct an empirical analysis to compare
the implications of the theory with the data; and (5) evaluate the results of your
comparisons. The criteria for a useful theory or model are that (1) it has reasonable and
realistic assumptions; (2) it is understandable and manageable enough for studying real
problems; (3) its implications can be tested empirically using real-world data; and (4) its
implications are consistent with the data.
8. Yes, it is possible for economists to agree about the effects of a policy (that is, to agree
on the positive analysis of the policy), but to disagree about the policys desirability
(normative analysis). For example, suppose economists agreed that reducing inflation to
zero within the next year would cause a recession (positive analysis). Some economists
might argue that inflation should be reduced, because they prefer low inflation even at the
cost of higher unemployment. Others would argue that inflation isnt as harmful to people
as unemployment is, and would oppose such a policy. This is normative analysis, as it
involves a value judgment about what policy should be.
9. Classicals see wage and price adjustment occurring rapidly, while Keynesians think
that wages and prices adjust only slowly when the economy is out of equilibrium. The
classical theory implies that unemployment will not persist because wages and prices
adjust to bring the economy rapidly back to equilibrium. But if Keynesian theory is
correct, then the slow response of wages and prices means that unemployment may
persist for long periods of time unless the government intervenes.

10. Stagflationwasacombinationofstagnation(highunemployment)andinflationinthe
1970s.ItchangedeconomistsviewsbecausetheKeynesianapproachcouldntexplain
stagflationsatisfactorily.

Chapter 1 Numerical Problems

1. (a) Averagelaborproductivityisoutputdividedbyemployment:
2005:12,000tonsofpotatoesdividedby1000workers12tonsofpotatoesperworker
2006:14,300tonsofpotatoesdividedby1100workers13tonsofpotatoesperworker
(b) Thegrowthrateofaveragelaborproductivityis[(13/12)1]100%8.33%.
(c) Theunemploymentrateis:
2005:(100unemployed/1100workers)100%9.1%
2006:(50unemployed/1150workers)100%4.3%
(d) Theinflationrateis[(2.5/2)1]100%25%.
2. Theanswerstothisproblemwillvarydependingonthecurrentdate.Theanswershereare
basedontheAugust2006SurveyofCurrentBusiness,Tables1.1.5and3.2.Numbersareat
annualratesinbillionsofdollars.
GDP
Exports
Imports
Federalreceipts
Federalexpenditures

11,712.5
1,178.1
1,791.4
2,001.0
2,383.0

12,455.8
1,303.1
2,019.9
2,246.8
2,555.9

13,008.4
1,405.4
2,170.6
2,473.2
2,637.9

10.1%
15.3%
5.2%

10.5%
16.2%
5.8%

10.8%
16.7%
5.9%

17.1%
20.3%
3.3%

18.0%
20.5%
2.5%

19.0%
20.3%
1.3%

a.
Exports/GDP
Imports/GDP
Tradeimbalance/GDP
b.
Federalreceipts/GDP
Federalexpenditures/GDP
Deficit/GDP

Chapter 1 Analytical Problems

1. Yes,averagelaborproductivitycanfallevenwhentotaloutputisrising.Averagelabor
productivityistotaloutputdividedbyemployment.Soaveragelaborproductivitycanfallif
outputandemploymentarebothrisingbutemploymentisrisingfaster.
Yes,theunemploymentratecanalsoriseeventhoughtotaloutputisrising.Thiscanoccura
numberofdifferentways.Forexample,averagelaborproductivitymightberisingwith
employmentconstant,sothatoutputisrising;butthelaborforcemaybeincreasingaswell,
sothattheunemploymentrateisrising.Oraveragelaborproductivitymightbeconstant,and
bothemploymentandunemploymentcouldriseatthesametimebecauseofanincreasein
thelaborforce,withthenumberofunemployedrisingbyagreaterpercentage.
2. Justbecausepriceswerelowerin1890thantheywerein2006doesnotmeanthatpeople
werebetteroffbackthen.Peoplesincomeshaverisenmuchfasterthanpriceshaverisen
overthelast100years,sotheyarebetterofftodayintermsofrealincome.

4. (a) Positive.Thisstatementtellswhatwillhappen,notwhatshouldhappen.
(b) Positive.Eventhoughitisaboutincomedistributionissues,itisastatementoffact,not
opinion.IfthestatementsaidThepayrolltaxshouldbereducedbecauseit...,thenit
wouldbeanormativestatement.
(c) Normative.Sayingtaxesaretoohighsuggeststhattheyshouldbelower.
(d) Positive.Sayswhatwillhappenasaconsequenceofanaction,notwhatshouldbedone.
(e) Normative.Thisisastatementofpreferenceaboutpolicies.

Chapter2
Chapter 2 Review Questions
1. Thethreeapproachestonationalincomeaccountingaretheproductapproach,theincome
approach,andtheexpenditureapproach.Theyallgivethesameanswerbecausetheyare
designedthatway;anyentrybasedononeapproachhasanentryintheotherapproaches
withthesamevalue.Wheneveroutputisproducedandsold,itsproductioniscountedinthe
productapproach,itssaleiscountedintheexpenditureapproach,andthefundsreceivedby
thesellerarecountedintheincomeapproach.
3. Intermediategoodsandservicesareusedupinproducingothergoodsinthesameperiod
(year)inwhichtheywereproduced,whilefinalgoodsandservicesarethosethatare
purchasedbyconsumersorarecapitalgoodsthatareusedtoproducefutureoutput.The
distinctionisimportant,becausewewanttocountonlythevalueoffinalgoodsproducedin
theeconomy,notthevalueofgoodsproducedeachstepalongtheway.
4. GNPisthemarketvalueoffinalgoodsandservicesnewlyproducedbydomesticfactorsof
productionduringthecurrentperiod,whereasGDPisproductiontakingplacewithina
country.
Thus,GNPdiffersfromGDPwhenforeignfactorsareusedtoproduceoutputinacountry,
orwhendomesticfactorsareusedtoproduceoutputinanothercountry.GDPGNPNFP,
whereNFPnetfactorpaymentsfromabroad,whichequalsincomepaidtodomestic
factorsofproductionbytherestoftheworldminusincomepaidtoforeignfactorsof
productionbythedomesticeconomy.Acountrythatemploysmanyforeignworkerswill
likelyhavenegativeNFP,soGDPwillbehigherthanGNP.
5. Thefourcomponentsofspendingareconsumption,investment,governmentpurchases,and
netexports.Importsmustbesubtracted,becausetheyareproducedabroadandwewant
GDPtocountonlythosegoodsandservicesproducedwithinthecountry.Forexample,
supposeacarbuiltin
JapanisimportedintotheUnitedStates.ThecarcountsasconsumptionspendinginU.S.
GDP,butissubtractedasanimportaswell,soonnetitdoesnotaffectU.S.GDP.However,
itiscountedinJapansGDPasanexport.
7. Nationalwealthisthetotalwealthoftheresidentsofacountry,andconsistsofitsdomestic
physicalassetsandnetforeignassets.Wealthisimportantbecausethelongruneconomic
wellbeingofacountrydependsonit.Nationalwealthisrelatedtonationalsavingbecause
nationalsavingistheflowofadditionstothestockofnationalwealth.

8. RealGDPistheusefulconceptforfiguringoutacountrysgrowthperformance.Nominal
GDPmayrisebecauseofincreasesinpricesratherthangrowthinrealoutput.
9. TheCPIisapriceindexthatiscalculatedasthevalueofafixedsetofconsumergoodsand
servicesatcurrentpricesdividedbythevalueofthefixedsetatbaseyearprices.CPI
inflationisthegrowthrateoftheCPI.CPIinflationoverstatestrueinflationbecauseitis
hardtomeasurechangesinquality,andbecausethepriceindexdoesntaccountfor
substitutionawayfromgoodsthatbecomerelativelymoreexpensivetowardsgoodsthat
becomerelativelycheaper.
10. Thenominalinterestrateistherateatwhichthenominal(ordollar)valueofanassetincreases
overtime.Therealinterestrateistherateatwhichtherealvalueorpurchasingpowerofan
assetincreasesovertime,andisequaltothenominalinterestrateminustheinflationrate.The
expectedrealinterestrateistherateatwhichtherealvalueofanassetisexpectedtoincrease
overtime.Itisequaltothenominalinterestrateminustheexpectedinflationrate.Theconcept
thatismostimportanttoborrowersandlendersistheexpectedrealinterestrate,becauseit
affectstheirdecisionstoborroworlend.

Chapter 2 Numerical Problems

2.

5.

(a) FurnituremadeinNorthCarolinathatisboughtbyconsumerscountsasconsumption,
soconsumptionincreasesby$6billion,investmentisunchanged,governmentpurchases
areunchanged,netexportsareunchanged,andGDPincreasesby$6billion.
(b) FurnituremadeinSwedenthatisboughtbyconsumerscountsasconsumptionand
imports,
soconsumptionincreasesby$6billion,investmentisunchanged,governmentpurchases
areunchanged,netexportsfallby$6billion,andGDPisunchanged.
(c) FurnituremadeinNorthCarolinathatisboughtbybusinessescountsasinvestment,
soconsumptionisunchanged,investmentincreasesby$6billion,governmentpurchases
areunchanged,netexportsareunchanged,andGDPincreasesby$6billion.
(d) FurnituremadeinSwedenthatisboughtbybusinessescountsasinvestmentand
imports,
soconsumptionisunchanged,investmentincreasesby$6billion,governmentpurchases
areunchanged,netexportsdeclineby$6billion,andGDPisunchanged.
Givendata:I40,G30,GNP200,CA20NXNFP,T60,TR25,INT15,
NFP
792.SinceGDPGNPNFP,GDP200(2)202Y.SinceNXNFPCA,
NXCANFP20(2)18.SinceYCIGNX,CY(IGNX)202
(4030(18))150.
Spvt(YNFPTTRINT)C(202(2)602515)15030.Sgovt(TTR
INT)G(602515)3010.SSpvtSgovt30(10)20.
(a) Consumption150
(b) Netexports18
(c) GDP202
(d) Netfactorpaymentsfromabroad2
(e) Privatesaving30
(f) Governmentsaving10

(g) Nationalsaving20

6.
Baseyearquantitiesatcurrentyearprices
Apples
Bananas
Oranges
Total

3000$3$9,000
6000$2$12,000
8000$5$40,000
$61,000

Currentyearquantitiesatcurrentyearprices
Apples
Bananas
Oranges
Total

4,000$3$12,000
14,000$2$28,000
32,000$5$160,000
$200,000

atbaseyearprices
3000$2$6,000
6000$3$18,000
8000$4$32,000
$56,000

atbaseyearprices
4,000$2$8,000
14,000$3$42,000
32,000$4$128,000
$178,000

(a) NominalGDPisjustthedollarvalueofproductioninayearatpricesinthatyear.
NominalGDPis$56thousandinthebaseyearand$200thousandinthecurrentyear.
NominalGDPgrew257%betweenthebaseyearandthecurrentyear:
[($200,000/$56,000)1]100%257%.
(b) RealGDPiscalculatedbyfindingthevalueofproductionineachyearatbaseyear
prices.
Thus,fromthetableabove,realGDPis$56,000inthebaseyearand$178,000inthe
currentyear.Inpercentageterms,realGDPincreasesfromthebaseyeartothecurrent
yearby
[($178,000/$56,000)1]100%218%.
(c) TheGDPdeflatoristheratioofnominalGDPtorealGDP.Inthebaseyear,nominal
GDPequalsrealGDP,sotheGDPdeflatoris1.Inthecurrentyear,theGDPdeflatoris
$200,000/$178,0001.124.ThustheGDPdeflatorchangesby[(1.124/1)1]100%
12.4%fromthebaseyeartothecurrentyear.
(d) NominalGDProse257%,pricesrose12.4%,andrealGDProse218%,somostofthe
increaseinnominalGDPisbecauseoftheincreaseinrealoutput,notprices.Noticethat
thequantityoforangesquadrupledandthequantityofbananasmorethandoubled.
7.

Calculatinginflationrates:
192930:[(50.0/51.3)1]100%2.5%
193031:[(45.6/50.0)1]100%8.8%
193132:[(40.9/45.6)1]100%10.3%
193233:[(38.8/40.9)1]100%5.1%
Theseallshowdeflation(pricesaredecliningovertime),whereasrecentlywehavehad
nothingbutinflation(pricesrisingovertime).

8.

Thenominalinterestrateis[(545/500)1]100%9%.Theinflationrateis[(214/200)
1]100%7%.Sotherealinterestrateis2%(9%nominalrate7%inflationrate).
Expectedinflationwasonly[(210/200)1]100%5%,sotheexpectedrealinterestrate
was4%(9%nominalrate5%expectedinflationrate).

Chapter 2 Analytical Problems

2.

NationalsavingdoesnotrisebecauseoftheswitchtoCheapCallbecausealthough
consumptionspendingdeclinesby$2million,sohavetotalexpenditures(GDP),which
equaltotalincome.Sinceincomeandspendingbothdeclinedbythesameamount,national
savingisunchanged.

3.

(a) Theprobleminaplannedeconomyisthatpricesdonotmeasuremarketvalue.When
thepriceofanitemistoolow,thengoodsarereallymoreexpensivethantheirlisted
pricesuggestsweshouldincludeintheirmarketvaluethevalueoftimespentby
consumerswaitingtomakepurchases.Becausetheitemsvalueexceedsitscost,
measuredGDPistoolow.
Whenthepriceofanitemistoohigh,goodsstockedontheshelvesmaybevaluedtoo
highly.Thisresultsinanovervaluationoffirmsinventories,sothatmeasuredGDPis
toohigh.

ApossiblestrategyfordealingwiththisproblemistohaveGDPanalystsestimatewhat
themarketpriceshouldbe(perhapsbylookingatpricesofthesamegoodsinmarket
economies)andusethisshadowpriceintheGDPcalculations.
(b) ThegoodsandservicesthatpeopleproduceathomearenotcountedintheGDPfigures
becausetheyarenotsoldonthemarket,makingtheirvaluedifficulttomeasure.One
waytodoitmightbetolookatthestandardoflivingrelativetoamarketeconomy,and
estimatewhatincomeitwouldtakeinamarketeconomytosupportthatstandardof
living.

Chapter 3 Answers
Chapter 3 Review Questions
1. Aproductionfunctionshowshowmuchoutputcanbeproducedwithagivenamountof
capitalandlabor.Theproductionfunctioncanshiftduetosupplyshocks,whichaffect
overallproductivity.Examplesincludechangesinenergysupplies,technological
breakthroughs,andmanagementpractices.Besidesknowingtheproductionfunction,you
mustalsoknowthequantitiesofcapitalandlabortheeconomyhas.
2. Theupwardslopeoftheproductionfunctionmeansthatanyadditionalinputsofcapitalor
laborproducemoreoutput.Thefactthattheslopedeclinesaswemovefromlefttoright
illustratestheideaofdiminishingmarginalproductivity.Forafixedamountofcapital,
additionalworkerseachaddlessadditionaloutputasthenumberofworkersincreases.Fora
fixednumberofworkers,additionalcapitaladdslessadditionaloutputastheamountof
capitalincreases.
3. Themarginalproductofcapital(MPK)istheoutputproducedperunitofadditionalcapital.
TheMPKcanbeshowngraphicallyusingtheproductionfunction.Forafixedleveloflabor,
plottheoutputprovidedbydifferentlevelsofcapital;thisistheproductionfunction.The
MPKisjusttheslopeoftheproductionfunction.
4. Themarginalrevenueproductoflaborrepresentsthebenefittoafirmofhiringanadditional
worker,whilethenominalwageisthecost.Comparingthebenefittothecost,thefirmwill
hireadditionalworkersaslongasthemarginalrevenueproductoflaborexceedsthenominal
wage,sincedoingsoincreasesprofits.Profitswillbeattheirhighestwhenthemarginal
revenueproductoflaborjustequalsthenominalwage.
Thesameconditioncanbeexpressedinrealtermsbydividingthroughbythepriceofthe
good.Themarginalrevenueproductoflaborequalsthemarginalproductoflabortimesthe
priceofthegood.Thenominalwageequalstherealwagetimesthepriceofthegood.
Dividingeachofthesethroughbythepriceofthegoodmeansthatanequivalentprofit
maximizingconditionisthemarginalproductoflaborequalstherealwage.
5. TheMPNcurveshowsthemarginalproductoflaborateachlevelofemployment.Itis
relatedtotheproductionfunctionbecausethemarginalproductoflaborisequaltotheslope
oftheproductionfunction(whereoutputisplottedagainstemployment).TheMPNcurveis
relatedtolabordemand,becausefirmshireworkersuptothepointatwhichtherealwage
equalsthemarginalproductoflabor.SothelabordemandcurveisidenticaltotheMPN
curve,exceptthattheverticalaxisistherealwageinsteadofthemarginalproductoflabor.

6. Atemporaryincreaseintherealwageincreasestheamountoflaborsuppliedbecausethe
substitutioneffectislargerthantheincomeeffect.Thesubstitutioneffectarisesbecausea
higherrealwageraisesthebenefitofadditionalworkforaworker.Theincomeeffectis
smallbecausetheincreaseintherealwageistemporary,soitdoesntchangetheworkers
incomeverymuch,thustheworkerwontreducetimespentworkingverymuch.
Apermanentincreaseintherealwage,however,hasamuchlargerincomeeffect,sincea
workerslifetimeincomeischangedsignificantly.Theincomeeffectmaybesolargethatit
exceedsthesubstitutioneffect,causingtheworkertoreducetimespentworking.
7. Theaggregatelaborsupplycurverelateslaborsupplyandtherealwage.Theprincipal
factorsshiftingtheaggregatelaborsupplycurvearewealth,theexpectedfuturerealwage,
thecountrysworkingagepopulation,orchangesinthesocialorlegalenvironmentthatlead
tochangesinlaborforceparticipation.Increasesinwealthortheexpectedfuturerealwage
shifttheaggregatelaborsupplycurvetotheleft.Increasesintheworkingagepopulationor
inlaborforceparticipationshifttheaggregatelaborsupplycurvetotheright.
8. Fullemploymentoutputisthelevelofoutputthatfirmssupplywhenwagesandpricesinthe
economyhavefullyadjusted;intheclassicalmodelofthelabormarket,thisoccurswhenthe
labormarketisinequilibrium.Whenlaborsupplyincreases,fullemploymentoutput
increases,asthereisnowmorelaboravailabletoproduceoutput.Whenabeneficialsupply
shockoccurs,thenthesamequantitiesoflaborandcapitalproducemoreoutput,sofull
employmentoutputrises.Furthermore,
abeneficialsupplyshockincreasesthedemandforlaborateachrealwageandleadstoan
increaseintheequilibriumlevelofemployment,whichalsoincreasesoutput.
9. Theclassicalmodelofthelabormarketassumesthatanyworkerwhowantstoworkatthe
equilibriumrealwagecanfindajob,soitisnotveryusefulforstudyingunemployment.

10. Thelaborforceconsistsofallemployedandunemployedworkers.Theunemploymentrateisthe
fractionofthelaborforcethatisunemployed.Theparticipationrateisthefractionoftheadult
populationthatisinthelaborforce.Theemploymentratioisthefractionoftheadultpopulation
thatisemployed.
11. Anunemploymentspellisaperiodoftimethatapersoniscontinuouslyunemployed.
Durationisthelengthoftimeofanunemploymentspell.Twoseeminglycontradictoryfacts
arethatmostunemploymentspellshaveashortdurationandthatmostpeoplewhoare
unemployedataparticulartimeareexperiencingspellswithlongdurations.Thesecanbe
reconciledbyrealizingthattheremaybealotofpeoplewithshortspellsandafewpeople
withlongspells.Onanygivendate,asurveyfindsafairlylongaveragedurationforthe
unemployed,becauseofthepeoplewithlongspells.Forexample,supposethateachweek
onepersonbecomesunemployedforoneweek,sotherearefiftytwosuchshort
unemploymentspellsduringtheyear.Andsupposethattherearefourpeoplewhoare
unemployedallyear,sotherearefourlongunemploymentspellsduringtheyear.Inany
givenweekfivepeopleareunemployed:oneunemployedpersonhasaspellofoneweek,
whilefourhavespellsofayear.Somostspellshaveashortduration(fiftytwoshortspells
comparedtofourlongspells),butmostpeoplewhoareunemployedatagiventimeare
experiencingspellswithlongduration(oneshortspellcomparedtofourlongspells).
12. Frictionalunemploymentarisesasworkersandfirmssearchtofindmatches.Acertain
amountoffrictionalunemploymentisnecessary,becauseitisnotalwayspossibletofindthe
rightmatchrightaway.Forexample,anunemployedbankermaynotwanttotakeajob
flippinghamburgersifheorshecannotfindanotherbankingjobrightaway,becausethe
matchwouldbeverypoor.Byremainingunemployedandcontinuingtosearchforamore
suitablejob,thebankerislikelytomakeabettermatch.Thatwillbebetterbothforthe
banker(sincethesalaryislikelytobehigher)andforsocietyasawhole(sincethebetter
matchmeansgreaterproductivityintheeconomy).
13. Structuralunemploymentoccurswhenpeoplesufferlongspellsofunemploymentorare
chronicallyunemployed(withmanyspellsofunemployment).Structuralunemployment
ariseswhenthenumberofpotentialworkerswithlowskilllevelsexceedsthenumberofjobs
requiringlowskilllevels,orwhentheeconomyundergoesstructuralchange,whenworkers
wholosetheirjobsinshrinkingindustriesmayhavedifficultyfindingnewjobs.
14. Thenaturalrateofunemploymentistherateofunemploymentthatprevailswhenoutputand
employmentareattheirfullemploymentlevels.Thenaturalrateofunemploymentisequal
totheamountoffrictionalunemploymentplusstructuralunemployment.Cyclical
unemploymentisthedifferencebetweentheactualrateofunemploymentandthenatural
rateofunemployment.Whencyclicalunemploymentisnegative,outputandemployment
exceedtheirfullemploymentlevels.
15. OkunsLawisaruleofthumbthattellshowmuchoutputfallswhentheunemploymentrate
rises.Itiswritteneitherintermsofthelevelsofoutputandunemployment,asinEq.(3.5),(
Y Y)/ Y 2
(u u ),orintermsofchangesinoutputandunemployment,asinEq.(3.6),Y/Y32
u.SincetheOkunslawcoefficientis2,a2percentagepointincreaseintheunemployment
ratecausesoutputtodeclineby4%.

Chapter 3 Numerical Problems

3.

(a)
N
1
2
3
4
5
6

Y
8
15
21
26
30
33

MPN
8
7
6
5
4
3

MRPN(P 5)
40
35
30
25
20
15

MRPN(P 10)
80
70
60
50
40
30

(b) P$5.
(1) W$38.Hireoneworker,sinceMRPN($40)isgreaterthanW($38)atN1.Do
nothiretwoworkers,sinceMRPN($35)islessthanW($38)atN2.
(2) W$27.Hirethreeworkers,sinceMRPN($30)isgreaterthanW($27)atN3.Do
nothirefourworkers,sinceMRPN($25)islessthanW($27)atN4.
(3) W$22.Hirefourworkers,sinceMRPN($25)isgreaterthanW($22)atN4.Do
nothirefiveworkers,sinceMRPN($20)islessthanW($22)atN5.
(c) Figure3.10plotstherelationshipbetweenlabordemandandthenominalwage.This
graphisdifferentfromalabordemandcurvebecausealabordemandcurveshowsthe
relationshipbetweenlabordemandandtherealwage.Figure3.11showsthelabor
demandcurve.

Figure 3.10

Figure 3.11

(d) P$10.ThetableinpartashowstheMRPNforeachN.AtW$38,thefirmshould
hirefiveworkers.MRPN($40)isgreaterthanW($38)atN5.Thefirmshouldnthire
sixworkers,sinceMRPN($30)islessthanW($38)atN6.Withfiveworkers,output
is30widgets,comparedto8widgetsinpartawhenthefirmhiredonlyoneworker.So
theincreaseinthepriceoftheproductincreasesthefirmslabordemandandoutput.
(e) Ifoutputdoubles,MPNdoubles,soMRPNdoubles.TheMRPNisthesameasitwasin
partdwhenthepricedoubled.Solabordemandisthesameasitwasinpartd.Butthe
outputproducedbyfiveworkersnowdoublesto60widgets.
(f) SinceMRPNPMPN,thenadoublingofeitherPorMPNleadstoadoublingof
MRPN.SincelabordemandischosenbysettingMRPNequaltoW,thechoiceisthe
same,whether
PdoublesorMPNdoubles.


5.

(a) Ifthelumpsumtaxisincreased,theresanincomeeffectonlaborsupply,nota
substitutioneffect(sincetherealwageisntchanged).Anincreaseinthelumpsumtax
reducesaworkerswealth,solaborsupplyincreases.
(b) IfT35,thenNS2212w(235)9212w.LabordemandisgivenbywMPN

3092N,or2N309w,soN154.5w/2.Settinglaborsupplyequaltolabordemand
gives154.5w/29212w,so62.512.5w,thusw62.5/12.55.Withw5,N92
(125)152.
(c) Sincetheequilibriumrealwageisbelowtheminimumwage,theminimumwageis
binding.Withw7,N154.57/2151.0.NotethatNS92(127)176,soNS
>Nandthereisunemployment.

7.

(a) Atanydate,25peopleareunemployed:5whohavelosttheirjobsatthestartofthemonth
and20whohavelosttheirjobseitheronJanuary1orJuly1.Theunemploymentrateis
25/5005%.
(b) Eachmonth,5peoplehaveonemonthspells.Everysixmonths,20peoplehavesix
monthspells.Thetotalnumberofspellsduringtheyearis(512)(202)100.
Sixtyofthespells(60%ofallspells)lastonemonth,while40ofthespells(40%ofall
spells)lastsixmonths.
(c) Theaveragedurationofaspellis(0.601month)(0.406months)3months.
(d) Onanygivendate,thereare25peopleunemployed.Twentyofthem(80%)havelong
spellsofunemployment,while5ofthem(20%)haveshortspells.

Chapter 3 Analytical Problems

2.

(a) Anincreaseinthenumberofimmigrantsincreasesthelaborforce,increasing
employmentandincreasingfullemploymentoutput.
(b) Ifenergysuppliesbecomedepleted,thisislikelytoreduceproductivity,becauseenergy
isafactorofproduction.Sothereductioninenergysuppliesreducesfullemployment
output.
(c) Bettereducationraisesfutureproductivityandoutput,buthasnoeffectoncurrentfull
employmentoutput.
(d) Thisreductioninthecapitalstockreducesfullemploymentoutput(althoughitmayvery
wellincreasewelfare).