Macro|Chapter 3| Supply Side of Classical Model

What are the differences between the Classic and the Keynesian model?

1. The classic model assumes that prices are perfectly flexible, the Keynesian model says that prices are sticky

2. Classic model implies full utilization of resources, such as full employment. The Keynesian model, however, posits that there may be involuntary unemployment i.e: underutilization of resources

3. Classic model is considered to be a long run model, the Keynesian model is considered to be a short run model

What does the supply and demand depend on in the Classic model?

The supply side is the output Y, which is a function of Labor and Capital. Y (L, K) and represents the level of technology in an economy

The demand side depends on Consumption (C), Investment (I), and Government Expenditure (G)

What are some problems with assuming that the production function (Y) has constant returns to scale?

It sweeps under the rug:

1. Network Connections between firms and industries

2. Invisible Capital

3. Organization, institution

Using mathematical notation (Y and z), show hwat constant, increaseing and decreasing returns to scale mean

Explain when we have increasing and decreasing returns to scale

We have increasing returns to scale when there is:

1. Learning by doing

2. Externality

3. Winner Takes it All

We have decreasing returns to scale when we have:

1. Erosion of Land

2. Deterioration of Climate

3. Tech Bottlenecks

What determines the distribution of Output? Represent this mathematically.

The distribuition of output is determined by factor prices (Wage and Rental Rate)

Derive that the Cobb douglass production has constant returns to scale

Use the profit maximization method to prove that MPL = Real wage

Suppose the Black Death happens again and we can’t cure it. How does this affect real wages and real rental prices? Show with an economic diagram.

How does the recent immigration policy affect real wages and real rental prices? Show with an economic diagram

Derive the factor prices of real wage and real rental price for the Cobb-Douglas function

In the Cobb-Douglass function the capital stock doubles. What happens to the share of income held by Labor?

It stays the same. Only depends on alpha.