c) (3 points) Express the equation for labour demand by the firm which maximizes its profits (Hint: take a first order derivative of the profits with respect to number of workers, and set it equal to 0). Graph the labour demand. Explain how labour demand depends on labour productivity z.

 

(3 points) Graph the labour market equilibrium in the two countries (label your graph). How do labour outcomes in Australia and New Zealand differ? Assume that substitution effect dominates the wealth effect in labour supply decision. Be careful to distinguish the movements along a curve, and shifts of a curve (Hint: combine your analysis of labour demand and labour supply to determine how wage depends on productivity.)

               

e) (3 points) Graph the general equilibrium in the two countries. Based on your analysis, what can you say about the employment, GDP and average welfare in the two countries?

  

  Question 3 (5 points): Question 2, Ch. 1, Andolfatto p. 37 2. We often read that ‘the consumer’ drives the economy because consumption

accounts for 60% of GDP. On the other hand, it is also true that ‘the

laborer’ accounts for 75% of GDP; yet we seldom (if ever) hear of stories

relating to how the GDP depends on the supply of labor. Why do you

think this may be the case?

Question 4 (5 points): Question 7, Ch. 1, Andolfatto p. 37

7. Consider two economies A and B that each have a real per capita GDP

equal to $1,000 in the year 1900. Suppose that economy A grows at 2%

per annum, while economy B grows at 1.5% per annum. The difference

in growth rates does not seem very large, but compute the GDP in these

two economies for the year 2000. In percentage terms, how

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