Preference Shocks and Production Shocks. Suppose that firms and consumers co-exist in the static(one-period) consumption-leisure model. The representative firm uses only labor to produce its outputgood, which the representative consumer uses for consumption. Suppose the production function islinear in labor, so that output of the firm is given by A. n, where A is a production function shock (aka,exogenous total factor productivity). Suppose there are no taxes of any kind, and the consumer's utilityfunction is given by u(Bc, I) (the function u satisfies all the usual properties we assume for utilityfunctions), with the exogenous parameter B denoting a preference shifter. Finally, the real wage isgiven by w = A.A. Briefly explain why the real wage is given by w = A.For each of the following three questions, clearly sketch your diagrams on ONE SINGLE graph withconsumption on the vertical axis and leisure on the horizontal axis.B. Suppose currently A= A and B = Bo (that is, A and Bo are some current values for the productionshock and preference shock, respectively). On your diagram, clearly (qualitatively) sketch anindifference map, a budget constraint, and associated optimal choices of consumption and leisure.C. Suppose a negative technology shock occurs, lowering A from A to A1 < Ao. B = BO still. On yourdiagram, clearly (qualitatively) sketch an indifference map, a budget constraint, and associated optimalchoices of consumption and leisure. Briefly explain any differences between your sketch here and thatin part b.D. Suppose a preference shock occurs, lowering B from Bo to B₁ < Bo. The level of productivity is stillas in part c (that is, A= A₁). On your diagram, clearly (qualitatively) sketch an indifference map, abudget constraint, and associated optimal choices of consumption and leisure. Briefly explain anydifferences between your sketch here and those in part b and part c as well as any key economicinterpretation of your result.

The optimum utility refers to the highest level of satisfaction or well-being that a consumer can…

Preference Shocks and Production Shocks. Suppose that firms and consumers co-exist in the static (one-period) consumption-leisure model. The representative firm uses only labor to produce its output good, which the representative consumer uses for consumption. Suppose the production function is linear in labor, so that output of the firm is given by A. n, where A is a production function shock (aka, exogenous total factor productivity). Suppose there are no taxes of any kind, and the consumer's utilit function is given by u(Bc, I) (the function u satisfies all the usual properties we assume for utility functions), with the exogenous parameter B denoting a preference shifter. Finally, the real wage is given by w = A. A. Briefly explain why the real wage is given by w = A. For each of the following three questions, clearly sketch your diagrams on ONE SINGLE graph with

Preference Shocks and Production Shocks. Suppose that firms and consumers co-exist in the static (one-period) consumption-leisure model. The representative firm uses only labor to produce its output good, which the representative consumer uses for consumption. Suppose the production function is linear in labor, so that output of the firm is given by A. n, where A is a production function shock (aka, exogenous total factor productivity). Suppose there are no taxes of any kind, and the consumer's utilit function is given by u(Bc, I) (the function u satisfies all the usual properties we assume for utility functions), with the exogenous parameter B denoting a preference shifter. Finally, the real wage is given by w = A. A. Briefly explain why the real wage is given by w = A. For each of the following three questions, clearly sketch your diagrams on ONE SINGLE graph with

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter11: Profit Maximization

Section: Chapter Questions

Problem 11.14P

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