Question 7 (2.5 points)

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 that Congress passes a law decreases spending on research and development which results in a decrease in total factor productivity in the economy. If the real wage is completely flexible, what will happen to the marginal productivity of capital?

Question 7 options:

	There would be an increase in the marginal productivity of capital
	There would be a decrease in the marginal productivity of capital
	There would be no change in the marginal productivity of capital
	There is not enough information to determine if a change in the marginal productivity of capital would occur.

Question 8 (2.5 points)

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 that Congress passes a law decreases spending on research and development which results in a decrease in total factor productivity in the economy. If the real wage is sticky/rigid, what will happen to the output level?

Question 8 options:

	The level of output will increase
	The level of output will decrease
	The level of output will remain the same
	Not enough information to determine the outcome of output

Question 9 (2.5 points)

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 that Congress passes a law decreases spending on research and development which results in a decrease in total factor productivity in the economy. If the real wage is sticky/rigid, what will happen to the real wage and quantity of labor?

Question 9 options:

	The real wage and labor will remain constant
	The real wage will remain constant and labor will increase
	The real wage will remain constant and labor will decrease
	The real wage will increase and labor will increase