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1. Suppose there is an economy with one household who cares only about consumption of a final good (clocks) and leisure. The household has h
1. Suppose there is an economy with one household who cares only about consumption of a final good (clocks) and leisure. The household has h = 100. The household's preferences over consumption of clocks and leisure is given by the following utility function: u(C, () = 2C + 500 In((). There is a single firm which makes clocks. The firm uses household labour and a fixed amount of capital equal to K = 16 to produce clocks. The production function for producing clocks is given by Y = = (ND).(K)-5. Here z randomly fluctuates between zz = 12 and ZH = 15. You will need to use the quadratic formula for this question. (1.A.) (35 points) Complete the first two columns of Table 1 for the two values that z can take. Use your answers to determine the qualitative predictions of this economy regarding the cyclical properties (procyclical, countercyclical, or acyclical) of consumption, real wages, labour hours, average labour pro- ductivity, and profits when there are technology shocks. Provide economic intuition to explain each of these cyclical properties.
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