Question

Questions 5 to 7 Consider the simple production model studied in class but with different exponents Suppose that the production function is Cobb-Douglas. Namely, we have Y = AKUL The data for this economy is A 10, K 60 and the initial population is 30. We will assume that everyone in this country works so that population equals employment and per-person GDP equals per-worker GDP. The economy is hit by a hurricane. As a result, half of the stock of capital is destroyed (K,=30) but fortunately no one is hurt. Question 5. In the Capital market the Demand will result, the rental rate will and the Supply will. As a a) Shift to the Right; Remain unaffected; Increase b) Remain unaffected: Shift to the Left: Increase c) Shift to Left; Shift to the Left: Increase d) Remain unaffected: Shift to the Right: Fall Question 6. Compute per capita GDP before and after the hurricane. Based on your calculation, which of the statements below is correct? a) Per-capita GDP will not be affected. b) Per-capita GDP will fall between 3 and 7%. c) Per-capita GDP will fall between 12 and 16%. d) Per-capita GDP will increase between 7 and 12% Question 7. Compute the equilibrium wage before and after the hurricane. Based on your calculation, which of the statements below is correct? a) The wage will fall between 3 and 7%. b) The wage will fall between 12 and 16%. c) The wage will increase between 7 and 12%. d) The wage will not be affected.

Answer 1

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