Consider the one period model of consumption and leisure as presented in class.

a) Discuss what forces lie behind the response of labor supply to wages, capital and government

expenditure.

b) Assume this economy begins in some equilibrium and then the (exogenous) level of capital increases. Use the labor market to illustrate the adjustment of the economy assuming the response of labor demand to the shock is larger than that of labor supply. Explain carefully the adjustment from the initial to the final equilibrium describing the effects on wages, employment, output and

consumption.

c) Discuss the effect of the shock on output and (accounting) profits.

d) Are consumers better off after the

increase in capital? Explain your answer