1. In this question, we add uncertainty into the example economy from Question One on Assignment Two. Recall the description of that economy. The household has h = 100 units of time and the household's preferences over consumption of clocks and leisure is given by the following utility function: u(C, f) = 20 + 5001n(). The rm that produces clocks uses household labour and a xed amount of capital equal to K = 16 with the following production function: Y = 2 (ND)'5 (Io-5. Here 2 randomly uctuates between 2;, = 12 and 23 = 15. At the beginning of each quarter, the household and the rm receive an announcement stating how severe global supply chain [GSC) disruptions will be during that quarter. The announcement can be either very seven: or not severe. (I realize this doesn't quite t the description of clock production here but global supply chain disruptions are very current so let's go with it.) Each quarter, the household and the rm choose labour supply and labour demand after receiving the announcement regarding GSC disruptions but before observing 2:. They cannot change labour input after observing 2 but the wage and output can adjust after 2: is observed. The household and the rm know that the probability of a particular 2 occurring in a quarter is related to the severity of GSC disruptions: p(zL, very severe) = 0.75 p(zL, not severe) = 0.20. (1.A.) (15 points) Complete Table 1. Use your results to determine the qualitative predictions of this economy regarding the cyclical properties of equilibrium consumption, real wages, average labour productivity, and labour hours when there are uctuations only in the armouncement regarding GSC disruptions (that is, an expectations-driven business cycle). Provide economic intuition to explain each of these cyclical properties. Table 1: Aggregate Variables With and Without Uncertainty With Uncertainty | No Uncertainty Report is Report is VERY Severe NOT Severe GSC Disruptions GSC Disruptions z = m = 15 Variable Column 1| X we 4.09 YE 317.98 at?\" 4.81 N* 38.87 1\" 374.99 LP" 9.62 | 0* 374.99 | U (0*,2\") 2804.66 | 2808.69 (1.B.) (9 points) Compare the level of household utility in Column 1 to the level of household utility in Column 3 and provide economic intuition for the direction of the dierence between these two utility levels. Someone might argue that this result implies that households should ignore the armouneement regarding GSC disruptions and always work 44.44 hours. Explain why they might argue this and explain why they are incorrect. (1.C.) (10 points) For a general case in which the signal equals g and the productivity parameter equals zy, draw a single schematic PPF diagram to depict expected and equilibrium output, expected and equilibrium real wages, expected and equilibrium labour input, and the expected and equilibrium indifference curve of the household in the economy with uncertainty. On the same diagram, depict equilibrium output, real wages, labour input, and the indifference curve of the household in the economy without uncertainty. You do not need to depict the household's overall constraints. You do not need to draw the diagram for the specific example economy in this question - that turns out to be difficult because expected outcomes and equilibrium outcomes are fairly close together in the example and this makes it hard to draw both easily on the same diagram