Question
Consider the simple (one-period) production model. The production function is Cobb-Douglas, exhibits constant returns to scale, and the exponent on capital equals 0.50. Suppose also
Consider the simple (one-period) production model. The production function is Cobb-Douglas, exhibits constant returns to scale, and the exponent on capital equals 0.50. Suppose also that all households in the economy are composed of two adults so that household income is the sum of the wages received by both adults in the family. Suppose also that all households have young children.
In year 2019 (initial equilibrium), the economy's parameter values were A=500, K=600 and L=300? Compute the equilibrium wage and household income. Pick the correct statement below.
- Household income will be roughly equal to 250.
- Household income will be roughly equal to 488.
- Household income will be roughly equal to 354.
- Household income will be roughly equal to 708.
In year 2020 (final equilibrium), the government shuts down in-person schools and all children have to stay home and switch to remote learning. As a result, one parent in each household with young children quits the labor force to care for his/her children. Suppose that the economy's parameter values are now A=500, K=600 and L=250. Compute the equilibrium wage and pick the correct statement below.
- Household income will be roughly equal to 262.
- Household income will be roughly equal to 554.
- Household income will be roughly equal to 775.
- Household income will be roughly equal to 387.
What is the change in overall GDP between the two years?
- An 8% increase.
- A 5% increase.
- A 5% reduction.
- An 8% reduction.
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