SPRING SEMESTER 2001-02
ASSESSMENT 1A
Answer both questions (and all parts thereof).
1. In relation to the Classical Model of the economy, state whether the following are true, false or uncertain and BRIEFLY explain why:
(a) a fall in people's preference for leisure will increase employment and
output. (17 marks)
(b) a fall in the savings ratio will increase output and raise interest rates. (17 marks) (c) a rise in public spending will increase output in the short and long run.
(17 marks) 2. A firm produces a good from inputs of capital and labour. The amount of capital
is fixed in the short run and labour is measured by the number of workers employed. Use the following data to draw the firm’s short-run production function:
No. of men 1 2 3 4 5 6 7 8 9 10 Output 8 19 33 50 71 89 104 116 125 131 (a) If the money wage is £24 and the firm sells the good it produces for £4,
how many workers will the firm employ? (20 marks) (b) If the economy consists of 3000 firms, all identical to the firm described
above, draw the aggregate demand for labour (ND) curve and derive its function. If the aggregate labour supply curve (NS) is given by
NS = 2000 (W/P) - 9000
(a) If the money wage is £24 and the firm sells it good at £4, then the ‘real wage’ is 6 units of the good.
The profit maximising firm would wish to set the marginal product of labour (MPL) equal to the ‘real wage’, so MPL = 6 .
From the output/employment table: MPL = 6 when the number of men
employed is equal to 10 (b) Demand for labour curves:
‘real wage’ firm’s demand aggregate demand aggregate supply 6 10 30,000 3,000 9 9 27,000 9,000 12 8 24,000 15,000 15 7 21,000 21,000 18 6 18,000 27,000 21 5 15,000 32,000 [The final column comes from NS = 2000 (W/P) - 9000.]
Note that the aggregate demand curve is simply the firm’s demand curve multiplied by 3000 (the number of firms).
Equilibrium occurs where the aggregate demand for labour cuts the aggregate supply of labour, i.e. at a ‘real wage’ of 15 . The number of workers employed will consequently be 21,000.
(c) The aggregate supply curve will be a vertical straight line at the level of output coinciding with employment of 21,000 men (i.e. 3,000 firms each employing 7 men). The output level consistent with this level of
employment will be
SPRING SEMESTER 2001-02
ASSESSMENT 1B
Answer both questions (and all parts thereof).
1. In relation to the Classical Model of the economy, state whether the following are true, false or uncertain and BRIEFLY explain why:
(a) a rise in people's preference for leisure will reduce output and
employment. (17 marks)
(b) a rise in people's desire to save will reduce output and raise interest rates. (17 marks) (c) a rise in the money supply will increase output in the short and long run.
(17 marks) 2. A firm produces a good from inputs of capital and labour. The amount of capital
is fixed in the short run and labour is measured by the number of workers employed. Use the following data to draw the firm’s short-run production function:
No. of men 1 2 3 4 5 6 7 8 9 10 Output 12 25 39 52 64 75 85 94 102 109 (a) If the money wage is £20 and the firm sells the good it produces for £2,
how many workers will the firm employ? (20 marks) (b) If the economy consists of 2000 firms, all identical to the firm described
above, draw the aggregate demand for labour (ND) curve and derive its function. If the aggregate labour supply curve (NS) is given by
NS = 2000 (W/P) - 2000
(a) If the money wage is £20 and the firm sells it good at £2, then the ‘real wage’ is 10 units of the good.
The profit maximising firm would wish to set the marginal product of labour (MPL) equal to the ‘real wage’, so MPL = 10 .
From the output/employment table: MPL = 10 when the number of men
employed is equal to 7 (b) Demand for labour curves:
‘real wage’ firm’s demand aggregate demand aggregate supply 7 10 20,000 12,000 8 9 18,000 14,000 9 8 16,000 16,000 10 7 14,000 18,000 11 6 12,000 20,000 12 5 10,000 22,000 13 4 8,000 24,000 [The final column comes from NS = 2000 (W/P) - 2000.]
Note that the aggregate demand curve is simply the firm’s demand curve multiplied by 2000 (the number of firms).
Equilibrium occurs where the aggregate demand for labour cuts the aggregate supply of labour, i.e. at a ‘real wage’ of 9 . The number of workers employed will consequently be 16,000.
(c) The aggregate supply curve will be a vertical straight line at the level of output coinciding with employment of 16,000 men (i.e. 2,000 firms each employing 8 men). The output level consistent with this level of
employment will be
SPRING SEMESTER 2001-02
ASSESSMENT 1C
Answer both questions (and all parts thereof).
1. In relation to the Classical Model of the economy, state whether the following are true, false or uncertain and BRIEFLY explain why:
(a) a rise in people's taste for consumption relative to leisure will increase
output. (17 marks)
(b) a rise in people's average propensity to consume will increase output and raise interest rates. (17 marks) (c) a rise in the money supply will increase output in the long run.
(17 marks) 2. A firm produces a good from inputs of capital and labour. The amount of capital
is fixed in the short run and labour is measured by the number of workers employed. Use the following data to draw the firm’s short-run production function:
No. of men 1 2 3 4 5 6 7 8 9 10 Output 10 24 40 56 70 82 92 100 106 110 (a) If the money wage is £16 and the firm sells the good it produces for £2,
how many workers will the firm employ? (20 marks) (d) If the economy consists of 4000 firms, all identical to the firm described
above, draw the aggregate demand for labour (ND) curve and derive its function. If the aggregate labour supply curve (NS) is given by
NS = 2000 (W/P)
(a) If the money wage is £16 and the firm sells it good at £2, then the ‘real wage’ is 8 units of the good.
The profit maximising firm would wish to set the marginal product of labour (MPL) equal to the ‘real wage’, so MPL = 8 .
From the output/employment table: MPL = 8 when the number of men
employed is equal to 8 (b) Demand for labour curves:
‘real wage’ firm’s demand aggregate demand aggregate supply 4 10 40,000 8,000 6 9 36,000 12,000 8 8 32,000 16,000 10 7 28,000 20,000 12 6 24,000 24,000 14 5 20,000 28,000 16 4 16,000 32,000 18 3 12,000 36,000 [The final column comes from NS = 2000 (W/P).]
Note that the aggregate demand curve is simply the firm’s demand curve multiplied by 4000 (the number of firms).
Equilibrium occurs where the aggregate demand for labour cuts the aggregate supply of labour, i.e. at a ‘real wage’ of 12 . The number of workers employed will consequently be 24,000.
(c) The aggregate supply curve will be a vertical straight line at the level of output coinciding with employment of 24,000 men (i.e. 4,000 firms each employing 6 men). The output level consistent with this level of
employment will be
