Q1.  Briefly answer the following questions.

a. Explain what is meant by diminishing marginal productivity of a factor? [4]

b. What factors (list at least two) cause labour demand to increase?[4]

c. What factors (list at least two) cause labour supply to decrease?[4]

d. What is the equilibrium condition for the Goods Market?[4]

e. If Ricardian Equivalence holds, what would be the effect of a temporary 
   increase of the income tax rate on consumption and savings?[4]



Q2.  Suppose an economy has the production function Y = AK0.25N0.75


In 1999:  Real GDP = 74,802; K = 268,147; N = 2414
In 2000:  Real GDP = 78,561; K = 301,262; N = 2632

a.  Calculate total factor productivity for 1999 and 2000.[6]

b.  What is the growth of total factor productivity from 1999 to 2000?[6]

c.  Calculate the percent increase in real GDP between 1999 and 2000.[6]

d.  Suppose productivity remains constant from 2000 to 2020, but K and N both triple during that time.
    What will GDP be in 2020?[6]

e.  (optional) Write a general expression that shows that if A remains constant,
    but K and N double, then GDP will double.[0]



Q3.  Suppose a firm's hourly marginal product of labour is given by MPN = A(350 - N)

a.  How are real wages determined in the labour market?  Explain how the MPN function
    is related to the labour demand function.  [3]

b.  Let A=0.3 and let the real wage be fixed at $15/hour.  How much labour will the firm want to hire?[3]

c.  Suppose real wages are no longer fixed, but are determined in the labour market equilibrium.
    Further suppose the aggregate supply of labour is N = 200 + 22w.  Find
    the equilibrium levels of employment (N) and real wage rate w.[13]

d.  Consider the effects in the labour market of a labour income tax, where the after tax income
    of a worker is (1-t)w, where t is the tax rate.  Labour supply is now N = 200 +22(1-t)w.  
    If t=0.4, whatwill be the new equilibrium values of w and N.[10]

e.  What would be the impact on the economy of the government fixing the real wage at $15? [5]   



Q4.  Quality Plastic has the following marginal production schedule:

	Number of Machines		Marginal Product of Additional Machine

	0				0
	1				$300
	2				$250
	3				$175
	4				$60
	5				$22

a.  If the real interest rate, r, is 12%, the depreciation rate of capital, d, is 13%,
    and, the real price of a machine, P, is $700, how many machines will
    Quality Plastic buy in order to maximize profit? [6]

b.  Suppose the government adds a tax on firm's revenues, t=15% of revenue.
    What is Quality Plastic's tax-adjusted user cost of capital?  How many machines should 
    Quality Plastic choose to purchase in this case? [14]



Q5.  Define the following:

a.  Full-Employment Output [2]

b.  Natural Rate of Unemployment [2]

c.  Cyclical Unemployment [2]





Q6.  (optional - practice only) An economy has full employment output(Y*) of $7000, G=$20, and NX = $0

    Desired Consumption C = 4300 - 3200r + 0.1Y*
    Desired Investment  I = 2100 - 6000r 

a.  Determine desired Savings, S, in this economy.

b.  What is the equilibrium condition in the goods market?

c.  Determine the equilibrium values of r, S and C in this economy.

d.  What happens to investment if G increases?  Explain intuitively.