Question: Assume that a Cobb-Douglas production function is a good representation of the economy, the substitution effect is stronger than the income effect, and that the
Assume that a Cobb-Douglas production function is a good representation of the economy, the substitution effect is stronger than the income effect, and that the economy was initially at equilibrium. Suppose a zombie outbreak spreads throughout the United States. Although the outbreak is ultimately eradicated, the United States nevertheless suffers a severe drop in population (and corresponding decrease in the labor force) with no reduction in machinery and equipment. If the real wage is completely flexible, what will happen to the equilibrium output level?
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