Author Question: Suppose a government tried to mandate a real wage above the equilibrium real wage. Assuming that ... (Read 99 times)

bobypop

  • Hero Member
  • *****
  • Posts: 539
Suppose a government tried to mandate a real wage above the equilibrium real wage. Assuming that factor markets are otherwise free and competitive, explain why the higher real wage would fail to increase the share of labor income in national income.
 
  What will be an ideal response?

Question 2

If the Fed is facing ________, the bank lending channel provides one explanation for why monetary policy may still be effective even when short-term nominal interest rates equal 0.
 
  A) an upward-shifting Phillips curve
  B) stagflation
  C) the zero bound constraint
  D) an economy where real GDP has surpassed potential GDP



jlaineee

  • Sr. Member
  • ****
  • Posts: 380
Answer to Question 1

Given the Cobb-Douglas production function, the marginal product of labor is , and the marginal product of capital is . If each factor's price is equal to its marginal product, then its share of total income equals its exponent in the production function; 0.7 for labor, and 0.3 for capital. Firms will respond to the mandated higher real wage by reducing the quantity of labor demanded until the marginal product of labor is equal to the real wage. Workers who still have a job will have higher income, but many workers now have no job and no income. The reduced labor input lowers the marginal product of capital. Since the rental price of capital is unregulated, it will fall, so that no capital becomes idle. Since the prices of both labor and capital are equal to their respective marginal products, their shares of the reduced total output are unchanged.

Answer to Question 2

C



Related Topics

Need homework help now?

Ask unlimited questions for free

Ask a Question
 

Did you know?

The training of an anesthesiologist typically requires four years of college, 4 years of medical school, 1 year of internship, and 3 years of residency.

Did you know?

Cutaneous mucormycosis is a rare fungal infection that has been fatal in at least 29% of cases, and in as many as 83% of cases, depending on the patient's health prior to infection. It has occurred often after natural disasters such as tornados, and early treatment is essential.

Did you know?

Hyperthyroidism leads to an increased rate of metabolism and affects about 1% of women but only 0.1% of men. For most people, this increased metabolic rate causes the thyroid gland to become enlarged (known as a goiter).

Did you know?

Drugs are in development that may cure asthma and hay fever once and for all. They target leukotrienes, which are known to cause tightening of the air passages in the lungs and increase mucus productions in nasal passages.

Did you know?

Aspirin may benefit 11 different cancers, including those of the colon, pancreas, lungs, prostate, breasts, and leukemia.

For a complete list of videos, visit our video library