ECON6002 Tutorial 11 (Capital and Labour Markets)
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ECON6002
Tutorial 11 (Capital and Labour Markets)
1. Consider the “Q” model of investment with adjustment costs. Describe the effects of each of the following changes on the K˙ = 0 and g˙ = 0 loci, on K and g at the time of the change, and on the their behaviour over time. In each case, assume that K and g are initially at their long-run equilibrium values.
(a) A war destroys half of the capital stock.
(b) The government taxes returns from owning firms at rate r (so that a firm’s profits per unit of capital for a given aggregate capital stock are (1 − r)π(K(t)) rather than π(K(t)).
(c) The government taxes investment. Specifically, firms pay the government A for each unit of capital they acquire, and receive a subsidy of A for each unit of disinvestment.
2. Describe how each of the following affects steady-state employment in the Diamond-Mortensen- Pissarides model.
(a) An increase in the job separation rate, m.
(b) An increase in the interest rate, r .
(c) An increase in the effectiveness of matching, k .
(d) An increase in income when unemployed, b.
(e) An increase in workers bargaining power, o.
2023-05-22