Advanced Macroeconomics 5th Edition David Romer - Solutions

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3.17. Constant returns to physical and human capital together. Suppose the pro- duction function is Y(t) = K(t)H(t) (0 < a < 1), and that K and H evolve according to K(t) = SKY(t), H(t) = SHY(t). (a) Show that regardless of the initial levels of K and H (as long as both are positive), the ratio K/H
3.16. Use the production function, (3.43), and equations (3.55) and (3.56) to derive the expressions in equations (3.61) and (3.62) for the marginal products of physical and human capital on the balanced growth path of the model of Part B of this chapter.
3.15. Consider the following variant of our model with physical and human capital:where a and a are the fractions of the stocks of physical and human capital used in the education sector. This model assumes that human capital is produced in its own sector with its own production function. Bodies
3.14. Suppose that, despite the political obstacles, the United States permanently reduces its budget deficit from 3 percent of GDP to zero. Suppose that the economy is described by the model of Part B of the chapter, and that a = 0.35 and = 0.4. Suppose that initially SK SH = 0.15, and that Sk
3.13. Consider the model of Part B of the chapter. (a) What is consumption per unit of effective labor on the balanced growth path? (b) What values of s and SH maximize this value?
3.12. Consider an economy described by the model of Part B of this chapter that is on its balanced growth path. Suppose there is a permanent increase in the rate of population growth. How does this affect output per worker over time?
3.11. Delays in the transmission of knowledge to poor countries. (a) Assume that the world consists of two regions, the North and the South. The North is described by Yy(t) = Ax (t)(1-a)Ly and Ay(t) = aLLNAN(t). The South does not do R&D but simply uses the technology developed in the North;
3.10. (This follows Krugman, 1979; see also Grossman and Helpman, 1991b.) Suppose the world consists of two regions, the "North" and the "South." Output and capital accumulation in region (i = N,S) are given by Y,(t) = K(t) [A,(t)(1a)L], K,(t)=s, Y,(t). New technologies are developed in the North.
3.9. (This follows Rebelo, 1991.) Assume that there are two factors of production, capital and land. Capital is used in both sectors, whereas land is used only in producing consumption goods. Specifically, the production functions are C(t) Kc(t) R- and K(t) = BKK (t), where Kc and Kk are the
3.8. Suppose that output at firm i is given by Y, KLIK L1, where K, and L, are the amounts of capital and labor used by the firm, K and I are the aggregate amounts of capital and labor, and a > 0, > 0, and 1. Assume that factors are paid their private marginal products; thus r = aY, K.
3.7. Learning-by-doing. Suppose that output is given by equation (3.22), Y(r) = KitA()L)], that L is constant and equal to 1, that K(t) = SY(t), and that knowledge accumulation occurs as a side effect of goods production: (t)-BY(t). (a) Find expressions for gx(t) and gx(t) in terms of A(t), K(t),
3.6. Consider the model of Section 3.3 with 3 + 8 = 1 and n- 0. (a) Using (3.14) and (3.15), find the value that A/K must have for gk and 94 to be equal. (b) Using your result in part (a), find the growth rate of A and K when 9k = 9A- (c) How does an increase in s affect the long-run growth rate of
3.5. Consider the economy described in Section 3.3, and assume 3 + 0 < 1 and n > 0. Suppose the economy is initially on its balanced growth path, and that there is a permanent increase in s. (a) How, if at all, does the change affect the g = 0 and 90 loci? How, if at all, does it affect the
3.4. Consider the economy analyzed in Section 3.3. Assume that + 0, and that the economy is on its balanced growth path. Describe how each of the following changes affects the 94 0 and 9x 0 lines and the position of the economy in (9.9x) space at the moment of the change: (a) An increase in n. (b)
3.3. Lags in a model of growth with an explicit knowledge-production sector. Assume that final-goods production is given by Y(t) = A(1)(1 - a)L, where a is the fraction of the population engaged in knowledge production and L. is population.a, and L. are exogenous and constant. Suppose that
3.2. Consider two economies (indexed by i 1, 2) described by Y,(t) K, (t)" and K(t)=s, Y,(t), where > 1. Suppose that the two economies have the same initial value of K, but that s > s. Show that Y/Y is continually rising.
3.1. Consider the model of Section 3.2 with # < 1. (a) On the balanced growth path, AgA(t), where g is the balanced- growth-path value of ga. Use this fact and equation (3.7) to derive an expression for A(t) on the balanced growth path in terms of B,a, y, 8, and L(t). (b) Use your answer to part
2.20. Explosive paths in the Samuelson overlapping-generations model (See Black, 1974; Brock, 1975; and Calvo, 1978a.) Consider the setup described in Problem 2.18. Assume that x is zero, and assume that utility is constant- relative-risk-aversion with
2.19. The source of dynamic inefficiency. There are two ways in which the Dia- mond and Samuelson models differ from textbook models. First, markets are incomplete: because individuals cannot trade with individuals who have not been born, some possible transactions are ruled out. Second, because
2.18. Stationary monetary equilibria in the Samuelson overlapping-generations model. (Again this follows Samuelson, 1958.) Consider the setup described in Problem 2.17. Assume that x < 1+n. Suppose that the old individuals in period 0, in addition to being endowed with Z units of the good, are each
2.17. The basic overlapping-generations model. (This follows Samuelson, 1958, and Allais, 1947.) Suppose, as in the Diamond model, that N, 2-period-lived individuals are born in period t and that N, = (1 + n)N-1. For simplicity, let utility be logarithmic with no discounting: U = In(C) + In(C2++1).
2.16. Social security in the Diamond model. Consider a Diamond economy where g is zero, production is Cobb-Douglas, and utility is logarithmic. (a) Pay-as-you-go social security. Suppose the government taxes each young individual amount T and uses the proceeds to pay benefits to old indi- viduals;
2.15. Depreciation in the Diamond model and microeconomic foundations for the Solow model. Suppose that in the Diamond model capital depreciates at rate , so that r = f'(k) - 8. (a) How, if at all, does this change in the model affect equation (2.60) giving kr+1 as a function of kr? (b) In the
2.14. A discrete-time version of the Solow model. Suppose Y = F(K, AL), with F() having constant returns to scale and the intensive form of the production function satisfying the Inada conditions. Suppose also that Ar+1 = (1+g)A L+1 = (1+n)L, and K+1 = K + SY - 8K. (a) Find an expression for k++1
2.13. Consider the Diamond model with logarithmic utility and Cobb-Douglas pro- duction. Describe how each of the following affects k+1 as a function of kr. (a) A rise in n. (b) A downward shift of the production function (that is, f(k) takes the form Bk", and B falls). (c) A rise in a.
2.12. Precautionary saving, non-lump-sum taxation, and Ricardian equivalence. (This follows Leland, 1968, and Barsky, Mankiw, and Zeldes, 1986.) Consider an individual who lives for two periods. The individual has no initial wealth and earns labor incomes of amounts Y and Y2 in the two periods. Y
2.11. The analysis of government policies in the Ramsey-Cass-Koopmans model in the text assumes that government purchases do not affect utility from private consumption. The opposite extreme is that government purchases and private consumption are perfect substitutes. Specifically, suppose that the
2.10. Using the phase diagram to analyze the impact of unanticipated and antic- ipated temporary changes. Analyze the following two variations on Problem 2.9: (a) At time 0, the government announces that it will tax investment income at rate from time 0 until some later date t; thereafter
2.9. Using the phase diagram to analyze the impact of an anticipated change. Consider the policy described in Problem 2.8, but suppose that instead of announcing and implementing the tax at time 0, the government announces at time 0 that at some later time, time t, investment income will begin to
2.8. Capital taxation in the Ramsey-Cass-Koopmans model. Consider a Ramsey- Cass-Koopmans economy that is on its balanced growth path. Suppose that at some time, which we will call time 0, the government switches to a pol- icy of taxing investment income at rate 7. Thus the real interest rate that
2.7. Derive an expression analogous to (2.37) for the case of a positive depreciation rate.
2.6. Describe how each of the following affect the = 0 and k = 0 curves in Figure 2.5, and thus how they affect the balanced-growth-path values of c and k: (a) A rise in 0. (b) A downward shift of the production function. (c) A change in the rate of depreciation from the value of zero assumed in
2.5. The productivity slowdown and saving. Consider a Ramsey-Cass-Koopmans economy that is on its balanced growth path, and suppose there is a permanent fall in g. (a) How, if at all, does this affect the k = 0 curve? (b) How, if at all, does this affect the = 0 curve? (c) What happens to c at the
2.4. Consider a household with utility given by (2.1)-(2.2). Assume that the real interest rate is constant, and let W denote the household's initial wealth plus the present value of its lifetime labor income (the right-hand side of [2.5]). Find the utility-maximizing path of C given r, W, and the
2.3. Assume that the instantaneous utility function u(C) in equation (2.1) is In C. Consider the problem of a household maximizing (2.1) subject to (2.5). Find an expression for C at each time as a function of initial wealth plus the present value of labor income, the path of r(t), and the
2.2. The elasticity of substitution with constant-relative-risk-aversion utility. Consider an individual who lives for two periods and whose utility is given by equation (2.46). Let P and P2 denote the prices of consumption in the two periods, and let W denote the value of the individual's lifetime
2.1. Consider N firms each with the constant returns to scale production function Y = F(K, AL), or (using the intensive form) Y = ALf(k). Assume f'() > 0, f" () < 0. Assume that all firms can hire labor at wage w and rent capital at cost r, and that all firms have the same value of A. (a) Consider
13. (a) In the model of convergence and measurement error in equations (1.33)- (1.34), suppose the true value of b is -1. Does a regression of In(Y/N)1979 In(Y/N)1870 on a constant and In(Y/N)1870 yield a biased estimate of b? Explain. (b) Suppose there is measurement error in measured 1979 income
1.12. Consider a Solow economy on its balanced growth path. Suppose the growth- accounting techniques described in Section 1.7 are applied to this economy. (a) What fraction of growth in output per worker does growth accounting attribute to growth in capital per worker? What fraction does it
1.11. Embodied technological progress. (This follows Solow, 1960, and Sato, 1966.) One view of technological progress is that the productivity of capital goods built att depends on the state of technology at t and is unaffected by subsequent technological progress. This is known as embodied
1.10. Natural resources in the Solow model. At least since Malthus, some have argued that the fact that some factors of production (notably land and natural resources) are available in finite supply must eventually bring growth to a halt. This problem asks you to address this idea in the context of
1.9. The Harrod-Domar model. (See Harrod, 1939, and Domar, 1946.) Suppose the production function is Leontief, Y(t) = min[ck K (t), CLet L(t)], where cx, CL, and g are all positive. As in the Solow model, L(t) = nL(t) and K (t) = sY(t)- SK (t). Finally, assume ck K(0) = CLL(0). (a) Under what
1.8. Suppose that, as in Problem 1.7, capital and labor are paid their marginal products. In addition, suppose that all capital income is saved and all labor income is consumed. Thus K = [F (K, AL)/K]K-8K. (a) Show that this economy converges to a balanced growth path. (b) Is k on the balanced
1.7. Factor payments in the Solow model. Assume that both labor and capital are paid their marginal products. Let w denote aF (K, AL)/L and r denote OF (K, AL)/OK. (a) Show that the marginal product of labor, w, is Alf(k) - kf'(k)]. (b) Show that if both capital and labor are paid their marginal
1.1.6. Suppose that, despite the political obstacles, the United States permanently reduces its budget deficit from 3% of GDP to zero. Suppose that initially s = 0.15 and that investment rises by the full amount of the fall in the deficit. Assume that capital's share is. (a) By about how much does
1.5. Find the elasticity of output per unit of effective labor on the balanced growth path, y, with respect to the rate of population growth, n. If ak (k"). 9. 2%, and 6 = 3%, by about how much does a fall in n from 2% to 1% raise y*?
1.3. Consider the constant elasticity of substitution (CES) production function, Y = K-10+(AL-1/jet-1), where 0 < < and 1. (or is the elasticity of substitution between capital and effective labor. In the special case of - 1, the CES function reduces to the Cobb-Douglas.) (a) Show that this
1.2. Suppose that the production function is Cobb-Douglas. (a) Find expressions for k*, y*, and c* as functions of the parameters of the model, s, n, 8, 9, anda. (b) What is the golden-rule value of k? (c) What saving rate is needed to yield the golden-rule capital stock?
1.1. Consider a Solow economy that is on its balanced growth path. Assume for simplicity that there is no technological progress. Now suppose that the rate of population growth falls. (a) What happens to the balanced-growth-path values of capital per worker, output per worker, and consumption per
Consider the model of crises in Section 13.9, and suppose T is distributed uniformly on some interval [μ − X,μ + X], where X > 0 and μ − X ≥ 0. Describe how, if at all, each of the following developments affects the two curves in (R, π)space that show the determination of R and π:(a) A
Debt as a means of mitigating the common-pool problem. (Chari and Cole, 1993.) Consider the same setup as in Problem 13.14.Suppose, however, that there is an initial level of debt, D. The government budget constraint is therefore D + M i=1 Gi = MT.(a) How does an increase in D affect the Nash
The common-pool problem in government spending. (Weingast, Shepsle, and Johnsen, 1981.) Suppose the economy consists of M > 1 congressional districts. The utility of the representative person living in district i is E + V(Gi ) −C (T ). E is the endowment, Gi is the level of a local public good in
Conditionality and reform. Consider the model in Section 13.6.Suppose an international agency offers to give the workers and capitalists each an amount F > 0 if they agree to reform. Use analysis like that in Problem 13.12 to show that this aid policy unambiguously raises the probability of reform
Crises and reform. Consider the model in Section 13.7.Suppose, however, that if there is no reform, workers and capitalists both receive payoffs of −C rather than 0, where C ≥ 0.(a) Find expressions analogous to (13.37) and (13.38) for workers’ proposal and the probability of reform.(b)
Consider the Alesina Drazen model. Describe how, if at all, each of the following developments affects workers’ proposal and the probability of reform:(a) A fall in T.(b) A rise in B.(c) An equal rise in A and B.
The Persson--Svensson model. (Persson and Svensson, 1989.) Suppose there are two periods. Government policy will be controlled by different policymakers in the two periods. The objective function of the period-t policymaker is U +αt[V(G1) + V (G2)], where U is citizens’ utility from their
Consider the Tabellini Alesina model in the case where α can only take on the values 0 and 1. Suppose, however, that there are 3 periods. The period-1 median voter sets policy in periods 1 and 2, but in period 3 a new median voter sets policy. Assume that the period-1 median voter’s α is 1, and
Consider the Tabellini Alesina model in the case where α can only take on the values 0 and 1. Suppose that the amount of debt to be issued, D, is determined before the preferences of the period-1 median voter are known. Specifically, voters vote on D at a time when the probabilities that αMED 1 =
Consider the Tabellini Alesina model in the case where α can only take on the values 0 and 1. Suppose that there is some initial level of debt, D0. How, if at all, does D0 affect the deficit in period 1?
The Condorcet paradox. Suppose there are three voters, 1, 2, and 3, and three possible policies, A, B, and C. Voter 1’s preference ordering is A, B, C; voter 2’s is B, C, A; and voter 3’s is C, A, B. Does any policy win a majority of votes in a two-way contest against each of the
If the tax rate follows a random walk (and if the variance of its innovations is bounded from below by a strictly positive number), then with probability 1 it will eventually exceed 100 percent or be negative. Does this observation suggest that the tax-smoothing model with quadratic distortion
Consider the Barro tax-smoothing model. Suppose there are two possible values of G(t) GH and GL with GH > GL . Transitions between the two values follow Poisson processes (see Sections 7.4 and 11.2). Specifically, if G equals GH , the probability per unit time that purchases fall to GL is a; if G
Consider the Barro tax-smoothing model. Suppose that output, Y, and the real interest rate, r, are constant, and that the level of government debt outstanding at time 0 is zero. Suppose that there will be a temporary war from time 0 to timeτ. Thus G(t) equals GH for 0 ≤ t ≤ τ , and equals GL
Precautionary saving, non-lump-sum taxation, and Ricardian equivalence. (Leland, 1968, and Barsky, Mankiw, and Zeldes, 1986.) Consider an individual who lives for two periods. The individual has no initial wealth and earns labor incomes of amounts Y1 and Y2 in the two periods. Y1 is known, but Y2
The stability of fiscal policy. (Blinder and Solow, 1973.) By definition, the budget deficit equals the rate of change of the amount of debt outstanding:δ (t) ≡ D(t). Define d(t) to be the ratio of debt to output: d(t) ≡ D(t)/Y(t). Assume that Y(t) grows at a constant rate g > 0.(a) Suppose
(Cagan, 1956.) Suppose that instead of adjusting their real money holdings gradually toward the desired level, individuals adjust their expectation of inflation gradually toward actual inflation. Thus equations (12.80) and (12.81) are replaced by m(t) = C exp(−bπe(t)) and πe(t) = β[π(t) −
Growth and seignorage, and an alternative explanation of the inflationgrowth relationship. (Friedman, 1971.) Suppose that money demand is given by ln(M/P ) = a − bi + ln Y, and that Y is growing at rate gY . What rate of inflation leads to the highest path of seignorage?
Rational political business cycles. (Alesina and Sachs, 1988.) Suppose the relationship between output and inflation is given by yt = yn + b(πt − Et−1πt), where b > 0 and where Et−1 denotes the expectation as of period t−1. Suppose there are two types of politicians, ‘‘liberals’’
The political business cycle. (Nordhaus, 1975.) Suppose the relationship between unemployment and inflation is described by πt = πt−1 − α(ut − un ) +εS t , α > 0, where the εS t ’s are i.i.d., mean-zero disturbances with cumulative distribution function F (•). Consider a politician
Consider the situation analyzed in Problem 12.19, but assume that there is only some finite number of periods rather than an infinite number. What is the unique equilibrium?
Other equilibria in the Barro Gordon model. Consider the situation described in Problem 12.19.Find the parameter values (if any) for which each of the following is an equilibrium:(a) One-period punishment. πe t equals ˆπ if πt−1 = πe t−1 and equals b/a otherwise; π = πˆ each period.(b)
Solving the dynamic-inconsistency problem through punishment.(Barro and Gordon, 1983.) Consider a policymaker whose objective function is ∞t=0 βt(yt − aπt 2/2), where a > 0 and 0
In the model of delegation analyzed in Section 12.8, suppose that the policymaker’s preferences are believed to be described by (12.69), with a > a , whenπe is determined. Is social welfare higher if these are actually the policymaker’s preferences, or if the policymaker’s preferences in
The tradeoff between low average inflation and flexibility in response to shocks with delegation of control over monetary policy. (Rogoff, 1985.) Suppose that output is given by y = yn + b(π − πe), and that the social welfare function is γy − aπ2/2, where γ is a random variable with mean
A model of reputation and monetary policy. (This follows Backus and Driffill, 1985, and Barro, 1986.) Suppose a policymaker is in office for two periods. Output is given by (12.63) each period. There are two possible types of policymaker, type 1 and type 2. A type-1 policymaker, which occurs with
(Fischer and Summers, 1989.) Suppose inflation is determined as in Section 12.8.Suppose the government is able to reduce the costs of inflation; that is, suppose it reduces the parameter a in equation (12.64). Is society made better or worse off by this change? Explain intuitively.
Consider the Krugman model of Section 12.7.Assume the economy is in a steady state starting in period 3 and that i1 = 0.(a) Suppose i2 = 0.(i) How, if at all, does an increase in M2, holding M1 and M∗ fixed, affect P1? Explain.(ii) How, if at all, does an increase in M∗, holding M1 and M2
Consider the Krugman model of Section 12.7.Assume that i1 = 0 and that the economy is in steady state starting in period 2. Suppose, however, that y1(the value of y in period 1) need not equal y∗ (the value of y starting in period 2). How, if at all, does a fall in y∗ affect the CC and/or MM
Consider the Krugman model of Section 12.7.Assume the economy is in a steady state of the type described in that section starting in period 2. Suppose, however, that prices are completely sticky in period 1, so that P1 = P, and that it is output rather than prices that adjusts in period 1 so that
The importance of using rather than saving your ammunition in the presence of the zero lower bound. Suppose inflation is described by the accelerationist Phillips curve, π(t) = λy(t), λ > 0, and that output is determined by a simple IS curve, y(t) = −b[i(t) − π(t)], b > 0. Initially, the
Uncertainty and policy. (Brainard, 1967.) Suppose output is given by y =x + (k + εk)z + u, where z is some policy instrument controlled by the government and k is the expected value of the multiplier for that instrument. εk and u are independent, mean-zero disturbances that are unknown when the
Money versus interest-rate targeting. (Poole, 1970.) Suppose the economy is described by linear IS and money-market equilibrium equations that are subject to disturbances: y = c − ai + ε1, m − p = hy − ki + ε2, where ε1 and ε2 are independent, mean-zero shocks with variances σ 2 1 and σ
Consider the system given by (12.41).(a) What does the system simplify to when φπ = 1? What are the eigenvalues of the system in this case? Suppose we look for self-fulfilling movements in~y and π of the form πt = λt Z, ~yt = cλt Z, |λ| ≤ 1. When φπ = 1, for what values of λ and c does
Consider the model of Section 12.4.Suppose, however, the aggregate supply equation, (12.16), is πt = πt−1 + α(yt−1 − yn t−1) + επt , where επ is a white-noise shock that is independent of εI S and εY. How, if at all, does this change to the model change expression (12.27) for q ∗?
Regime changes and the term structure of interest rates. (See Mankiw and Miron, 1986.) Consider an economy where money is neutral. Specifically, assume that πt = mt and that r is constant at zero. Suppose that the money supply is given by mt = kmt−1 + εt, where ε is a white-noise
Policy rules, rational expectations, and regime changes. (See Lucas, 1976, and Sargent, 1983.) Suppose that aggregate supply is given by the Lucas supply curve, yt = yn+b(πt−πe t ), b > 0, and suppose that monetary policy is determined by mt = mt−1 +a +εt, where ε is a white-noise
Suppose you want to test the hypothesis that the real interest rate is constant, so that all changes in the nominal interest rate reflect changes in expected inflation.Thus your hypothesis is it = r + Etπt+1.(a) Consider a regression of it on a constant and πt+1. Does the hypothesis that the real
Assume, as in Problem 12.2, that prices are completely unresponsive to unanticipated monetary shocks for one period and completely flexible thereafter. Assume also that y = c − ar and m − p = b + hy − ki hold each period. Suppose, however, that the money supply follows a random walk: mt =
Consider a discrete-time model where prices are completely unresponsive to unanticipated monetary shocks for one period and completely flexible thereafter.Suppose the IS equation is y = c − ar and that the condition for equilibrium in the money market is m − p = b +hy−ki. Here y, m, and p are
Consider a discrete-time version of the analysis of money growth, inflation, and real balances in Section 12.1.Suppose that money demand is given by mt − pt =c − b(Et pt+1 − pt), where m and p are the logs of the money stock and the price level, and where we are implicitly assuming that
The efficiency of the decentralized equilibrium in a search economy.Consider the steady state of the model of Section 11.4.Let the discount rate, r, approach zero, and assume that the firms are owned by the households; thus welfare can be measured as the sum of utility and profits per unit time,
Consider the static search and matching model analyzed in equations (11.71)(11.75). Suppose, however, that the matching function, M(•), is not assumed to be Cobb Douglas or to have constant returns. Is the condition for the decentralized equilibrium to be efficient still that the elasticity of
Consider the model of Section 11.4.(a) Use equations (11.65) and (11.69), together with the fact that VV = 0 in equilibrium, to find an expression for E as a function of the wage and exogenous parameters of the model.(b) Show that the impact of a rise in y on E is greater if w remains fixed than if
Consider the model of Section 11.4.Suppose the economy is initially in equilibrium, and that y then falls permanently. Suppose, however, that entry and exit are ruled out; thus the total number of jobs, F + V, remains constant.How do unemployment and vacancies behave over time in response to the
Consider the steady state of the Diamond Mortensen Pissarides model of Section 11.4.(a) Suppose that φ = 0. What is the wage? What does the equilibrium condition (11.70) simplify to?(b) Suppose that φ = 1. What is the wage? What does the equilibrium condition (11.70) simplify to? Is there any
Describe how each of the following affects steady-state employment in the Diamond Mortensen Pissarides model of Section 11.4:(a) An increase in the job breakup rate, λ.(b) An increase in the interest rate, r.(c) An increase in the effectiveness of matching, k.(d) An increase in income when
In the setup described in Problem 11.10, suppose that w is distributed uniformly on [μ − a,μ + a ] and that C < μ.(a) Find V in terms of μ,a, and C.(b) How does an increase in a affect V ? Explain intuitively.
Partial-equilibrium search. Consider a worker searching for a job. Wages, w, have a probability density function across jobs, f (w), that is known to the worker; let F (w) be the associated cumulative distribution function. Each time the worker samples a job from this distribution, he or she incurs
The Harris Todaro model. (Harris and Todaro, 1970.) Suppose there are two sectors. Jobs in the primary sector pay wp; jobs in the secondary sector pay ws.Each worker decides which sector to be in. All workers who choose the secondary sector obtain a job. But there are a fixed number, Np, of
An insider-outsider model. Consider the following variant of the model in equations (11.39) (11.42). The firm’s profits are π = AF (L I +LO )−wI L I − wO LO , where LI and LO are the numbers of insiders and outsiders the firm hires, and wI and wO are their wages. LI always equals L I , and

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Advanced Macroeconomics 5th Edition David Romer - Solutions

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