Question 2(10 pts)- The Representative Firm's Choice (a) What decision rule does the representative firm follow when choosing the quantity of labor? In other words, what is the optimality condition with respect to the quantity of labor? Keeping in mind the condition, draw the firm's current labor demand curve, denoted by . Make sure to show what are measured along the horizontal axis and the vertical axis. Is the curve upward-sloping or downward-sloping? Explain why. (b) What is the effect of an increase in current total factor productivity on the current labor demand curve? Does it shift or remain the same? If it shifts, which direction does it shift? Explain why. What happens if future total factor productivity increases, instead of the current productivity? Does the current labor demand curve shift or remain the same? Note that the effect of an increase in current capital stock is qualitatively the same as that of an increase in current total factor productivity through the same mechanism. (c) The firm needs to choose the quantity of investment. Note that one unit of consumption goods can be converted into one unit of investment goods in the current period, which turns into one unit of capital at the beginning of the future period. Show the marginal cost and the marginal benefit of investment. Then, derive the firm's optimal investment decision rule. (d) Using the optimal investment rule, draw the firm's investment demand curve, denoted by , on (,) plane with on the vertical axis. Is the curve upward-sloping or downwardsloping? Explain why. (e) What is the effect of an increase in future total factor productivity on the investment demand curve? Does it shift or remain the same? If it shifts, which direction does it shift? Explain why. What happens if current total factor productivity increases, instead of the future one? Does the investment demand curve shift or remain the same? (f) What is the effect of an increase in current capital on the investment demand curve? Does the curve shift or remain the same? If it shifts, which direction does it shift? Explain why.

(e) What is the effect of an increase in future total factor productivity on the investment demand curve? Does it shift or remain the same? If it shifts, which direction does it shift? Explain why. What happens if current total factor productivity increases, instead of the future one? Does the investment demand curve shift or remain the same? (f) What is the effect of an increase in current capital on the investment demand curve? Does the curve shift or remain the same? If it shifts, which direction does it shift? Explain why.Question 2 (10 pts) The Representative Firm's Choice {a) What decision rule does the representative firm follow when choosing the quantity of labar? In other words, what is the optimality condition with respect to the quantity of labor? Keeping in mind the condition, draw the firm's current labor demand curve, denoted by N9, Make sure to show what are measured along the horizontal axis and the vertical axis. 1s the curve upward-sloping or downward-sloping? Explain why. (b} What is the effect of an increase in current total factor productivity on the current labor demand curve? Does it shift or remain the same? IF it shifts, which direction does it shift? Explain why. What happens if future total factor productivity increases, instead of the current productivity? Does the current labor demand curve shift or remain the same? Note that the effect of an increase in current capital stock is qualitatively the same as that of an increase in current total factor productivity through the same mechanism. (} The firm needs to choose the quantity of investment. Note that one unit of consumption goods can be converted into one unit of investment goods in the current period, which turns into one unit of capital at the beginning of the future period. Show the marginal cost and the marginal benefit of investment. Then, derive the firm's optimal investment decision rule. (d) Using the optimal investment rule, draw the firm's investment demand curve, denoted by 19, on (19, r) plane with on the vertical axis. Is the curve upward-sloping or downward- sloping\"? Explain why. 2 3