chapter 3 Classical macroeconomics (1) : output and Employment

stions and Problems 1. How would the classical views on the creation of wealth differ from those of the mercantilists? 2. Explain the concept of an aggregate production function. How would you expect the pro- duction function in Figure 3-1 to be affected by an increase in the average and marginal productivity of labor for a given output level, owing, for example, to increased education of the labor force? How would such a shift in the production function affect the levels of out- put and employment in the classical model? 3. Explain the relationship between profit maximization condition and the labor demand as shown by equation (3.4). 4. Suppose that the public's taste changes in such a way that leisure comes to be more desira- ble than commodities. How would you expect such a change to affect output, employment, and the real wage in the classical model? 5. We termed the classical view of the labor market an auction market. What assumptions underlie this characterization? 6. In microeconomics, we expect the supply curve for the firm to slope upward to the right when drawn against price. The classical aggregate supply curve is based on this microeco- nomic theory of the firm but is vertical. Why? 7. Provide examples of demand-side factors that would not affect the level of output and employment. 8. Suppose that, due for example to reconstruction after a war, the capital stock of a nation increases. Use the graphical framework of Figure 3-4 to illustrate the effect that the increase in the capital stock would have on output, employment, and the real wage in the classical model. 9. Consider the effects of a government employment subsidy whereby the government paid 10 percent of the wages of newly hired workers. How would employment and output be affected by the program in the classical model? What would be the effect on the position of the aggregate supply schedule in Figure 3-67