consumer behavior representative consumer rationale two goods consumption bundles
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TRANSCRIPT
Consumer Behavior
Representative Consumer
bull 1048698 Rationale
bull 1048698 Two goods
bull 1048698 Consumption bundles
Representative Consumer
bull Preferences
bull Three properties of preferences
1More is preferred to less
2Likes diversity
3C and L are normal goods
Preferences Utility function andIndifference Curves
bull 1048698 Utility function
bull 1048698 What is an indifference curve
bull 1048698 Properties of indifference curves (derived from properties of preferences)
MRS(lC) Marginal Rate ofSubstitution of l for C
bull MRS(lC) amount of C we would give up to get one additional unit of l (at the margin)
bull Equal to (-1) times the slope of the indifference curve
bull Properties
Consumer Choice
bull Consumerrsquos ldquoproblemrdquo is to choose the best consumption bundle subject to constraints
ndash Time constraint
ndash Budget constraint
Budget Set (T lt π case)
Consumer Optimization
Income (or ldquoWealthrdquo) Effects
bull ldquoWhat happens when non-wage income changesrdquo
bull Change in non-wage income induces a ldquopure
income (wealth) effectrdquobull Recall ldquoboth goods are normalrdquo assumptio
nhellip So what is the net effect of Δ(π ndash T ) gt 0
Increase in the real wage rateIncome and substitution effects
bull Key w is1 wage earned on labor hours but also2 Price of leisure relative to consumptionbull Increase in w increases (wh + π ndash T)bull Then both goods normal sohellipbull But w increases price of l relative to C sohellipbull Conclusion Consumption must rise but leisure
may rise or fall
Increase in the real wage rateIncome and substitution effects
Labor Supply Curve
bull 1048698 Ns(w) = h ndash l(w)
bull 1048698 What is the effect of an increase in non-wage income (dividends or lump-sum taxes)
Production of Goods
bull What are goods good forbull ldquoTechnologyrdquo the Production FunctionY = zF( K Nd )ndash K and Nd are inputs or ldquofactors of producti
onrdquondash z is total factor productivitybull K is determined by past investmentbull Nd may be varied in the short run
Marginal Products MPN
bull Marginal product of labor (MPN) is the amount of additional output produced by adding an additional unit of Nd (holding K fixed)
Marginal Products MPK
bull Marginal product of capital (MPK) is the amount of additional output produced by adding an additional unit of K (holding Nd fixed)
Cobb-Douglas Production Fn
bull 1048698 Y = zKa (Nd)b
Assumptions about the productionfunction
bull 1 Constant returns to scale (CRS)Increasing production fnbull 2 uarrK or uarrNd causes uarrYEquivalent statement MPNgt0 MPKgt0
Diminishing marginal productsbull 3 MPN decreases as N increasesbull 4 MPK decreases as K increasesComplementarities in productionbull 5 MPN increases as K increases(and MPK increases as N increases)
bull Complementarities in prodrsquon
bull 5 MPN increases as K increases
(and MPK increases as N increases)
Figure 417 Adding Capital Increases the Marginal Product
of Labor
Whatrsquos z
bull 1048698 Total factor productivity represents level of
technology or efficiency in prodrsquon
Examples of z changes
ndash technological advance discovery of new techniquesetc
ndash Random economic shocks (weather)
ndash Inefficiency induced by govrsquot regulation
ndash Energy price shocks
Figure 418 Total Factor Productivity Increases
Figure 419 Effect of an Increase in Total Factor Productivity on the Marginal Product of Labor
The Objective of the Firm ishellip
MAXIMIZE PROFIT
Profit is
ndash Revenue minus costs
bull π = Y ndash wNd= zF( K Nd ) ndash wNd
Cobb-Douglas Production fn andthe Solow Residual
bull Y = zKa (Nd)bbull ndash Exhibits CRS if b = 1 ndash abull Theory says that share of Y paid to labor should
be 1-a 1 ndash a = wN Ybull Looking at data set 1 ndash a = 64 (a = 36)bull The ldquoSolow residualrdquo is measure of TFP (z)obtained this waybull z = Y ( K36 (Nd)64 )
Figure 420 The Solow Residual for the United States
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
-
Representative Consumer
bull Preferences
bull Three properties of preferences
1More is preferred to less
2Likes diversity
3C and L are normal goods
Preferences Utility function andIndifference Curves
bull 1048698 Utility function
bull 1048698 What is an indifference curve
bull 1048698 Properties of indifference curves (derived from properties of preferences)
MRS(lC) Marginal Rate ofSubstitution of l for C
bull MRS(lC) amount of C we would give up to get one additional unit of l (at the margin)
bull Equal to (-1) times the slope of the indifference curve
bull Properties
Consumer Choice
bull Consumerrsquos ldquoproblemrdquo is to choose the best consumption bundle subject to constraints
ndash Time constraint
ndash Budget constraint
Budget Set (T lt π case)
Consumer Optimization
Income (or ldquoWealthrdquo) Effects
bull ldquoWhat happens when non-wage income changesrdquo
bull Change in non-wage income induces a ldquopure
income (wealth) effectrdquobull Recall ldquoboth goods are normalrdquo assumptio
nhellip So what is the net effect of Δ(π ndash T ) gt 0
Increase in the real wage rateIncome and substitution effects
bull Key w is1 wage earned on labor hours but also2 Price of leisure relative to consumptionbull Increase in w increases (wh + π ndash T)bull Then both goods normal sohellipbull But w increases price of l relative to C sohellipbull Conclusion Consumption must rise but leisure
may rise or fall
Increase in the real wage rateIncome and substitution effects
Labor Supply Curve
bull 1048698 Ns(w) = h ndash l(w)
bull 1048698 What is the effect of an increase in non-wage income (dividends or lump-sum taxes)
Production of Goods
bull What are goods good forbull ldquoTechnologyrdquo the Production FunctionY = zF( K Nd )ndash K and Nd are inputs or ldquofactors of producti
onrdquondash z is total factor productivitybull K is determined by past investmentbull Nd may be varied in the short run
Marginal Products MPN
bull Marginal product of labor (MPN) is the amount of additional output produced by adding an additional unit of Nd (holding K fixed)
Marginal Products MPK
bull Marginal product of capital (MPK) is the amount of additional output produced by adding an additional unit of K (holding Nd fixed)
Cobb-Douglas Production Fn
bull 1048698 Y = zKa (Nd)b
Assumptions about the productionfunction
bull 1 Constant returns to scale (CRS)Increasing production fnbull 2 uarrK or uarrNd causes uarrYEquivalent statement MPNgt0 MPKgt0
Diminishing marginal productsbull 3 MPN decreases as N increasesbull 4 MPK decreases as K increasesComplementarities in productionbull 5 MPN increases as K increases(and MPK increases as N increases)
bull Complementarities in prodrsquon
bull 5 MPN increases as K increases
(and MPK increases as N increases)
Figure 417 Adding Capital Increases the Marginal Product
of Labor
Whatrsquos z
bull 1048698 Total factor productivity represents level of
technology or efficiency in prodrsquon
Examples of z changes
ndash technological advance discovery of new techniquesetc
ndash Random economic shocks (weather)
ndash Inefficiency induced by govrsquot regulation
ndash Energy price shocks
Figure 418 Total Factor Productivity Increases
Figure 419 Effect of an Increase in Total Factor Productivity on the Marginal Product of Labor
The Objective of the Firm ishellip
MAXIMIZE PROFIT
Profit is
ndash Revenue minus costs
bull π = Y ndash wNd= zF( K Nd ) ndash wNd
Cobb-Douglas Production fn andthe Solow Residual
bull Y = zKa (Nd)bbull ndash Exhibits CRS if b = 1 ndash abull Theory says that share of Y paid to labor should
be 1-a 1 ndash a = wN Ybull Looking at data set 1 ndash a = 64 (a = 36)bull The ldquoSolow residualrdquo is measure of TFP (z)obtained this waybull z = Y ( K36 (Nd)64 )
Figure 420 The Solow Residual for the United States
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
-
Preferences Utility function andIndifference Curves
bull 1048698 Utility function
bull 1048698 What is an indifference curve
bull 1048698 Properties of indifference curves (derived from properties of preferences)
MRS(lC) Marginal Rate ofSubstitution of l for C
bull MRS(lC) amount of C we would give up to get one additional unit of l (at the margin)
bull Equal to (-1) times the slope of the indifference curve
bull Properties
Consumer Choice
bull Consumerrsquos ldquoproblemrdquo is to choose the best consumption bundle subject to constraints
ndash Time constraint
ndash Budget constraint
Budget Set (T lt π case)
Consumer Optimization
Income (or ldquoWealthrdquo) Effects
bull ldquoWhat happens when non-wage income changesrdquo
bull Change in non-wage income induces a ldquopure
income (wealth) effectrdquobull Recall ldquoboth goods are normalrdquo assumptio
nhellip So what is the net effect of Δ(π ndash T ) gt 0
Increase in the real wage rateIncome and substitution effects
bull Key w is1 wage earned on labor hours but also2 Price of leisure relative to consumptionbull Increase in w increases (wh + π ndash T)bull Then both goods normal sohellipbull But w increases price of l relative to C sohellipbull Conclusion Consumption must rise but leisure
may rise or fall
Increase in the real wage rateIncome and substitution effects
Labor Supply Curve
bull 1048698 Ns(w) = h ndash l(w)
bull 1048698 What is the effect of an increase in non-wage income (dividends or lump-sum taxes)
Production of Goods
bull What are goods good forbull ldquoTechnologyrdquo the Production FunctionY = zF( K Nd )ndash K and Nd are inputs or ldquofactors of producti
onrdquondash z is total factor productivitybull K is determined by past investmentbull Nd may be varied in the short run
Marginal Products MPN
bull Marginal product of labor (MPN) is the amount of additional output produced by adding an additional unit of Nd (holding K fixed)
Marginal Products MPK
bull Marginal product of capital (MPK) is the amount of additional output produced by adding an additional unit of K (holding Nd fixed)
Cobb-Douglas Production Fn
bull 1048698 Y = zKa (Nd)b
Assumptions about the productionfunction
bull 1 Constant returns to scale (CRS)Increasing production fnbull 2 uarrK or uarrNd causes uarrYEquivalent statement MPNgt0 MPKgt0
Diminishing marginal productsbull 3 MPN decreases as N increasesbull 4 MPK decreases as K increasesComplementarities in productionbull 5 MPN increases as K increases(and MPK increases as N increases)
bull Complementarities in prodrsquon
bull 5 MPN increases as K increases
(and MPK increases as N increases)
Figure 417 Adding Capital Increases the Marginal Product
of Labor
Whatrsquos z
bull 1048698 Total factor productivity represents level of
technology or efficiency in prodrsquon
Examples of z changes
ndash technological advance discovery of new techniquesetc
ndash Random economic shocks (weather)
ndash Inefficiency induced by govrsquot regulation
ndash Energy price shocks
Figure 418 Total Factor Productivity Increases
Figure 419 Effect of an Increase in Total Factor Productivity on the Marginal Product of Labor
The Objective of the Firm ishellip
MAXIMIZE PROFIT
Profit is
ndash Revenue minus costs
bull π = Y ndash wNd= zF( K Nd ) ndash wNd
Cobb-Douglas Production fn andthe Solow Residual
bull Y = zKa (Nd)bbull ndash Exhibits CRS if b = 1 ndash abull Theory says that share of Y paid to labor should
be 1-a 1 ndash a = wN Ybull Looking at data set 1 ndash a = 64 (a = 36)bull The ldquoSolow residualrdquo is measure of TFP (z)obtained this waybull z = Y ( K36 (Nd)64 )
Figure 420 The Solow Residual for the United States
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
-
MRS(lC) Marginal Rate ofSubstitution of l for C
bull MRS(lC) amount of C we would give up to get one additional unit of l (at the margin)
bull Equal to (-1) times the slope of the indifference curve
bull Properties
Consumer Choice
bull Consumerrsquos ldquoproblemrdquo is to choose the best consumption bundle subject to constraints
ndash Time constraint
ndash Budget constraint
Budget Set (T lt π case)
Consumer Optimization
Income (or ldquoWealthrdquo) Effects
bull ldquoWhat happens when non-wage income changesrdquo
bull Change in non-wage income induces a ldquopure
income (wealth) effectrdquobull Recall ldquoboth goods are normalrdquo assumptio
nhellip So what is the net effect of Δ(π ndash T ) gt 0
Increase in the real wage rateIncome and substitution effects
bull Key w is1 wage earned on labor hours but also2 Price of leisure relative to consumptionbull Increase in w increases (wh + π ndash T)bull Then both goods normal sohellipbull But w increases price of l relative to C sohellipbull Conclusion Consumption must rise but leisure
may rise or fall
Increase in the real wage rateIncome and substitution effects
Labor Supply Curve
bull 1048698 Ns(w) = h ndash l(w)
bull 1048698 What is the effect of an increase in non-wage income (dividends or lump-sum taxes)
Production of Goods
bull What are goods good forbull ldquoTechnologyrdquo the Production FunctionY = zF( K Nd )ndash K and Nd are inputs or ldquofactors of producti
onrdquondash z is total factor productivitybull K is determined by past investmentbull Nd may be varied in the short run
Marginal Products MPN
bull Marginal product of labor (MPN) is the amount of additional output produced by adding an additional unit of Nd (holding K fixed)
Marginal Products MPK
bull Marginal product of capital (MPK) is the amount of additional output produced by adding an additional unit of K (holding Nd fixed)
Cobb-Douglas Production Fn
bull 1048698 Y = zKa (Nd)b
Assumptions about the productionfunction
bull 1 Constant returns to scale (CRS)Increasing production fnbull 2 uarrK or uarrNd causes uarrYEquivalent statement MPNgt0 MPKgt0
Diminishing marginal productsbull 3 MPN decreases as N increasesbull 4 MPK decreases as K increasesComplementarities in productionbull 5 MPN increases as K increases(and MPK increases as N increases)
bull Complementarities in prodrsquon
bull 5 MPN increases as K increases
(and MPK increases as N increases)
Figure 417 Adding Capital Increases the Marginal Product
of Labor
Whatrsquos z
bull 1048698 Total factor productivity represents level of
technology or efficiency in prodrsquon
Examples of z changes
ndash technological advance discovery of new techniquesetc
ndash Random economic shocks (weather)
ndash Inefficiency induced by govrsquot regulation
ndash Energy price shocks
Figure 418 Total Factor Productivity Increases
Figure 419 Effect of an Increase in Total Factor Productivity on the Marginal Product of Labor
The Objective of the Firm ishellip
MAXIMIZE PROFIT
Profit is
ndash Revenue minus costs
bull π = Y ndash wNd= zF( K Nd ) ndash wNd
Cobb-Douglas Production fn andthe Solow Residual
bull Y = zKa (Nd)bbull ndash Exhibits CRS if b = 1 ndash abull Theory says that share of Y paid to labor should
be 1-a 1 ndash a = wN Ybull Looking at data set 1 ndash a = 64 (a = 36)bull The ldquoSolow residualrdquo is measure of TFP (z)obtained this waybull z = Y ( K36 (Nd)64 )
Figure 420 The Solow Residual for the United States
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
-
Consumer Choice
bull Consumerrsquos ldquoproblemrdquo is to choose the best consumption bundle subject to constraints
ndash Time constraint
ndash Budget constraint
Budget Set (T lt π case)
Consumer Optimization
Income (or ldquoWealthrdquo) Effects
bull ldquoWhat happens when non-wage income changesrdquo
bull Change in non-wage income induces a ldquopure
income (wealth) effectrdquobull Recall ldquoboth goods are normalrdquo assumptio
nhellip So what is the net effect of Δ(π ndash T ) gt 0
Increase in the real wage rateIncome and substitution effects
bull Key w is1 wage earned on labor hours but also2 Price of leisure relative to consumptionbull Increase in w increases (wh + π ndash T)bull Then both goods normal sohellipbull But w increases price of l relative to C sohellipbull Conclusion Consumption must rise but leisure
may rise or fall
Increase in the real wage rateIncome and substitution effects
Labor Supply Curve
bull 1048698 Ns(w) = h ndash l(w)
bull 1048698 What is the effect of an increase in non-wage income (dividends or lump-sum taxes)
Production of Goods
bull What are goods good forbull ldquoTechnologyrdquo the Production FunctionY = zF( K Nd )ndash K and Nd are inputs or ldquofactors of producti
onrdquondash z is total factor productivitybull K is determined by past investmentbull Nd may be varied in the short run
Marginal Products MPN
bull Marginal product of labor (MPN) is the amount of additional output produced by adding an additional unit of Nd (holding K fixed)
Marginal Products MPK
bull Marginal product of capital (MPK) is the amount of additional output produced by adding an additional unit of K (holding Nd fixed)
Cobb-Douglas Production Fn
bull 1048698 Y = zKa (Nd)b
Assumptions about the productionfunction
bull 1 Constant returns to scale (CRS)Increasing production fnbull 2 uarrK or uarrNd causes uarrYEquivalent statement MPNgt0 MPKgt0
Diminishing marginal productsbull 3 MPN decreases as N increasesbull 4 MPK decreases as K increasesComplementarities in productionbull 5 MPN increases as K increases(and MPK increases as N increases)
bull Complementarities in prodrsquon
bull 5 MPN increases as K increases
(and MPK increases as N increases)
Figure 417 Adding Capital Increases the Marginal Product
of Labor
Whatrsquos z
bull 1048698 Total factor productivity represents level of
technology or efficiency in prodrsquon
Examples of z changes
ndash technological advance discovery of new techniquesetc
ndash Random economic shocks (weather)
ndash Inefficiency induced by govrsquot regulation
ndash Energy price shocks
Figure 418 Total Factor Productivity Increases
Figure 419 Effect of an Increase in Total Factor Productivity on the Marginal Product of Labor
The Objective of the Firm ishellip
MAXIMIZE PROFIT
Profit is
ndash Revenue minus costs
bull π = Y ndash wNd= zF( K Nd ) ndash wNd
Cobb-Douglas Production fn andthe Solow Residual
bull Y = zKa (Nd)bbull ndash Exhibits CRS if b = 1 ndash abull Theory says that share of Y paid to labor should
be 1-a 1 ndash a = wN Ybull Looking at data set 1 ndash a = 64 (a = 36)bull The ldquoSolow residualrdquo is measure of TFP (z)obtained this waybull z = Y ( K36 (Nd)64 )
Figure 420 The Solow Residual for the United States
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
-
Budget Set (T lt π case)
Consumer Optimization
Income (or ldquoWealthrdquo) Effects
bull ldquoWhat happens when non-wage income changesrdquo
bull Change in non-wage income induces a ldquopure
income (wealth) effectrdquobull Recall ldquoboth goods are normalrdquo assumptio
nhellip So what is the net effect of Δ(π ndash T ) gt 0
Increase in the real wage rateIncome and substitution effects
bull Key w is1 wage earned on labor hours but also2 Price of leisure relative to consumptionbull Increase in w increases (wh + π ndash T)bull Then both goods normal sohellipbull But w increases price of l relative to C sohellipbull Conclusion Consumption must rise but leisure
may rise or fall
Increase in the real wage rateIncome and substitution effects
Labor Supply Curve
bull 1048698 Ns(w) = h ndash l(w)
bull 1048698 What is the effect of an increase in non-wage income (dividends or lump-sum taxes)
Production of Goods
bull What are goods good forbull ldquoTechnologyrdquo the Production FunctionY = zF( K Nd )ndash K and Nd are inputs or ldquofactors of producti
onrdquondash z is total factor productivitybull K is determined by past investmentbull Nd may be varied in the short run
Marginal Products MPN
bull Marginal product of labor (MPN) is the amount of additional output produced by adding an additional unit of Nd (holding K fixed)
Marginal Products MPK
bull Marginal product of capital (MPK) is the amount of additional output produced by adding an additional unit of K (holding Nd fixed)
Cobb-Douglas Production Fn
bull 1048698 Y = zKa (Nd)b
Assumptions about the productionfunction
bull 1 Constant returns to scale (CRS)Increasing production fnbull 2 uarrK or uarrNd causes uarrYEquivalent statement MPNgt0 MPKgt0
Diminishing marginal productsbull 3 MPN decreases as N increasesbull 4 MPK decreases as K increasesComplementarities in productionbull 5 MPN increases as K increases(and MPK increases as N increases)
bull Complementarities in prodrsquon
bull 5 MPN increases as K increases
(and MPK increases as N increases)
Figure 417 Adding Capital Increases the Marginal Product
of Labor
Whatrsquos z
bull 1048698 Total factor productivity represents level of
technology or efficiency in prodrsquon
Examples of z changes
ndash technological advance discovery of new techniquesetc
ndash Random economic shocks (weather)
ndash Inefficiency induced by govrsquot regulation
ndash Energy price shocks
Figure 418 Total Factor Productivity Increases
Figure 419 Effect of an Increase in Total Factor Productivity on the Marginal Product of Labor
The Objective of the Firm ishellip
MAXIMIZE PROFIT
Profit is
ndash Revenue minus costs
bull π = Y ndash wNd= zF( K Nd ) ndash wNd
Cobb-Douglas Production fn andthe Solow Residual
bull Y = zKa (Nd)bbull ndash Exhibits CRS if b = 1 ndash abull Theory says that share of Y paid to labor should
be 1-a 1 ndash a = wN Ybull Looking at data set 1 ndash a = 64 (a = 36)bull The ldquoSolow residualrdquo is measure of TFP (z)obtained this waybull z = Y ( K36 (Nd)64 )
Figure 420 The Solow Residual for the United States
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
-
Consumer Optimization
Income (or ldquoWealthrdquo) Effects
bull ldquoWhat happens when non-wage income changesrdquo
bull Change in non-wage income induces a ldquopure
income (wealth) effectrdquobull Recall ldquoboth goods are normalrdquo assumptio
nhellip So what is the net effect of Δ(π ndash T ) gt 0
Increase in the real wage rateIncome and substitution effects
bull Key w is1 wage earned on labor hours but also2 Price of leisure relative to consumptionbull Increase in w increases (wh + π ndash T)bull Then both goods normal sohellipbull But w increases price of l relative to C sohellipbull Conclusion Consumption must rise but leisure
may rise or fall
Increase in the real wage rateIncome and substitution effects
Labor Supply Curve
bull 1048698 Ns(w) = h ndash l(w)
bull 1048698 What is the effect of an increase in non-wage income (dividends or lump-sum taxes)
Production of Goods
bull What are goods good forbull ldquoTechnologyrdquo the Production FunctionY = zF( K Nd )ndash K and Nd are inputs or ldquofactors of producti
onrdquondash z is total factor productivitybull K is determined by past investmentbull Nd may be varied in the short run
Marginal Products MPN
bull Marginal product of labor (MPN) is the amount of additional output produced by adding an additional unit of Nd (holding K fixed)
Marginal Products MPK
bull Marginal product of capital (MPK) is the amount of additional output produced by adding an additional unit of K (holding Nd fixed)
Cobb-Douglas Production Fn
bull 1048698 Y = zKa (Nd)b
Assumptions about the productionfunction
bull 1 Constant returns to scale (CRS)Increasing production fnbull 2 uarrK or uarrNd causes uarrYEquivalent statement MPNgt0 MPKgt0
Diminishing marginal productsbull 3 MPN decreases as N increasesbull 4 MPK decreases as K increasesComplementarities in productionbull 5 MPN increases as K increases(and MPK increases as N increases)
bull Complementarities in prodrsquon
bull 5 MPN increases as K increases
(and MPK increases as N increases)
Figure 417 Adding Capital Increases the Marginal Product
of Labor
Whatrsquos z
bull 1048698 Total factor productivity represents level of
technology or efficiency in prodrsquon
Examples of z changes
ndash technological advance discovery of new techniquesetc
ndash Random economic shocks (weather)
ndash Inefficiency induced by govrsquot regulation
ndash Energy price shocks
Figure 418 Total Factor Productivity Increases
Figure 419 Effect of an Increase in Total Factor Productivity on the Marginal Product of Labor
The Objective of the Firm ishellip
MAXIMIZE PROFIT
Profit is
ndash Revenue minus costs
bull π = Y ndash wNd= zF( K Nd ) ndash wNd
Cobb-Douglas Production fn andthe Solow Residual
bull Y = zKa (Nd)bbull ndash Exhibits CRS if b = 1 ndash abull Theory says that share of Y paid to labor should
be 1-a 1 ndash a = wN Ybull Looking at data set 1 ndash a = 64 (a = 36)bull The ldquoSolow residualrdquo is measure of TFP (z)obtained this waybull z = Y ( K36 (Nd)64 )
Figure 420 The Solow Residual for the United States
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
-
Income (or ldquoWealthrdquo) Effects
bull ldquoWhat happens when non-wage income changesrdquo
bull Change in non-wage income induces a ldquopure
income (wealth) effectrdquobull Recall ldquoboth goods are normalrdquo assumptio
nhellip So what is the net effect of Δ(π ndash T ) gt 0
Increase in the real wage rateIncome and substitution effects
bull Key w is1 wage earned on labor hours but also2 Price of leisure relative to consumptionbull Increase in w increases (wh + π ndash T)bull Then both goods normal sohellipbull But w increases price of l relative to C sohellipbull Conclusion Consumption must rise but leisure
may rise or fall
Increase in the real wage rateIncome and substitution effects
Labor Supply Curve
bull 1048698 Ns(w) = h ndash l(w)
bull 1048698 What is the effect of an increase in non-wage income (dividends or lump-sum taxes)
Production of Goods
bull What are goods good forbull ldquoTechnologyrdquo the Production FunctionY = zF( K Nd )ndash K and Nd are inputs or ldquofactors of producti
onrdquondash z is total factor productivitybull K is determined by past investmentbull Nd may be varied in the short run
Marginal Products MPN
bull Marginal product of labor (MPN) is the amount of additional output produced by adding an additional unit of Nd (holding K fixed)
Marginal Products MPK
bull Marginal product of capital (MPK) is the amount of additional output produced by adding an additional unit of K (holding Nd fixed)
Cobb-Douglas Production Fn
bull 1048698 Y = zKa (Nd)b
Assumptions about the productionfunction
bull 1 Constant returns to scale (CRS)Increasing production fnbull 2 uarrK or uarrNd causes uarrYEquivalent statement MPNgt0 MPKgt0
Diminishing marginal productsbull 3 MPN decreases as N increasesbull 4 MPK decreases as K increasesComplementarities in productionbull 5 MPN increases as K increases(and MPK increases as N increases)
bull Complementarities in prodrsquon
bull 5 MPN increases as K increases
(and MPK increases as N increases)
Figure 417 Adding Capital Increases the Marginal Product
of Labor
Whatrsquos z
bull 1048698 Total factor productivity represents level of
technology or efficiency in prodrsquon
Examples of z changes
ndash technological advance discovery of new techniquesetc
ndash Random economic shocks (weather)
ndash Inefficiency induced by govrsquot regulation
ndash Energy price shocks
Figure 418 Total Factor Productivity Increases
Figure 419 Effect of an Increase in Total Factor Productivity on the Marginal Product of Labor
The Objective of the Firm ishellip
MAXIMIZE PROFIT
Profit is
ndash Revenue minus costs
bull π = Y ndash wNd= zF( K Nd ) ndash wNd
Cobb-Douglas Production fn andthe Solow Residual
bull Y = zKa (Nd)bbull ndash Exhibits CRS if b = 1 ndash abull Theory says that share of Y paid to labor should
be 1-a 1 ndash a = wN Ybull Looking at data set 1 ndash a = 64 (a = 36)bull The ldquoSolow residualrdquo is measure of TFP (z)obtained this waybull z = Y ( K36 (Nd)64 )
Figure 420 The Solow Residual for the United States
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
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- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
-
Increase in the real wage rateIncome and substitution effects
bull Key w is1 wage earned on labor hours but also2 Price of leisure relative to consumptionbull Increase in w increases (wh + π ndash T)bull Then both goods normal sohellipbull But w increases price of l relative to C sohellipbull Conclusion Consumption must rise but leisure
may rise or fall
Increase in the real wage rateIncome and substitution effects
Labor Supply Curve
bull 1048698 Ns(w) = h ndash l(w)
bull 1048698 What is the effect of an increase in non-wage income (dividends or lump-sum taxes)
Production of Goods
bull What are goods good forbull ldquoTechnologyrdquo the Production FunctionY = zF( K Nd )ndash K and Nd are inputs or ldquofactors of producti
onrdquondash z is total factor productivitybull K is determined by past investmentbull Nd may be varied in the short run
Marginal Products MPN
bull Marginal product of labor (MPN) is the amount of additional output produced by adding an additional unit of Nd (holding K fixed)
Marginal Products MPK
bull Marginal product of capital (MPK) is the amount of additional output produced by adding an additional unit of K (holding Nd fixed)
Cobb-Douglas Production Fn
bull 1048698 Y = zKa (Nd)b
Assumptions about the productionfunction
bull 1 Constant returns to scale (CRS)Increasing production fnbull 2 uarrK or uarrNd causes uarrYEquivalent statement MPNgt0 MPKgt0
Diminishing marginal productsbull 3 MPN decreases as N increasesbull 4 MPK decreases as K increasesComplementarities in productionbull 5 MPN increases as K increases(and MPK increases as N increases)
bull Complementarities in prodrsquon
bull 5 MPN increases as K increases
(and MPK increases as N increases)
Figure 417 Adding Capital Increases the Marginal Product
of Labor
Whatrsquos z
bull 1048698 Total factor productivity represents level of
technology or efficiency in prodrsquon
Examples of z changes
ndash technological advance discovery of new techniquesetc
ndash Random economic shocks (weather)
ndash Inefficiency induced by govrsquot regulation
ndash Energy price shocks
Figure 418 Total Factor Productivity Increases
Figure 419 Effect of an Increase in Total Factor Productivity on the Marginal Product of Labor
The Objective of the Firm ishellip
MAXIMIZE PROFIT
Profit is
ndash Revenue minus costs
bull π = Y ndash wNd= zF( K Nd ) ndash wNd
Cobb-Douglas Production fn andthe Solow Residual
bull Y = zKa (Nd)bbull ndash Exhibits CRS if b = 1 ndash abull Theory says that share of Y paid to labor should
be 1-a 1 ndash a = wN Ybull Looking at data set 1 ndash a = 64 (a = 36)bull The ldquoSolow residualrdquo is measure of TFP (z)obtained this waybull z = Y ( K36 (Nd)64 )
Figure 420 The Solow Residual for the United States
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
-
Increase in the real wage rateIncome and substitution effects
Labor Supply Curve
bull 1048698 Ns(w) = h ndash l(w)
bull 1048698 What is the effect of an increase in non-wage income (dividends or lump-sum taxes)
Production of Goods
bull What are goods good forbull ldquoTechnologyrdquo the Production FunctionY = zF( K Nd )ndash K and Nd are inputs or ldquofactors of producti
onrdquondash z is total factor productivitybull K is determined by past investmentbull Nd may be varied in the short run
Marginal Products MPN
bull Marginal product of labor (MPN) is the amount of additional output produced by adding an additional unit of Nd (holding K fixed)
Marginal Products MPK
bull Marginal product of capital (MPK) is the amount of additional output produced by adding an additional unit of K (holding Nd fixed)
Cobb-Douglas Production Fn
bull 1048698 Y = zKa (Nd)b
Assumptions about the productionfunction
bull 1 Constant returns to scale (CRS)Increasing production fnbull 2 uarrK or uarrNd causes uarrYEquivalent statement MPNgt0 MPKgt0
Diminishing marginal productsbull 3 MPN decreases as N increasesbull 4 MPK decreases as K increasesComplementarities in productionbull 5 MPN increases as K increases(and MPK increases as N increases)
bull Complementarities in prodrsquon
bull 5 MPN increases as K increases
(and MPK increases as N increases)
Figure 417 Adding Capital Increases the Marginal Product
of Labor
Whatrsquos z
bull 1048698 Total factor productivity represents level of
technology or efficiency in prodrsquon
Examples of z changes
ndash technological advance discovery of new techniquesetc
ndash Random economic shocks (weather)
ndash Inefficiency induced by govrsquot regulation
ndash Energy price shocks
Figure 418 Total Factor Productivity Increases
Figure 419 Effect of an Increase in Total Factor Productivity on the Marginal Product of Labor
The Objective of the Firm ishellip
MAXIMIZE PROFIT
Profit is
ndash Revenue minus costs
bull π = Y ndash wNd= zF( K Nd ) ndash wNd
Cobb-Douglas Production fn andthe Solow Residual
bull Y = zKa (Nd)bbull ndash Exhibits CRS if b = 1 ndash abull Theory says that share of Y paid to labor should
be 1-a 1 ndash a = wN Ybull Looking at data set 1 ndash a = 64 (a = 36)bull The ldquoSolow residualrdquo is measure of TFP (z)obtained this waybull z = Y ( K36 (Nd)64 )
Figure 420 The Solow Residual for the United States
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
-
Labor Supply Curve
bull 1048698 Ns(w) = h ndash l(w)
bull 1048698 What is the effect of an increase in non-wage income (dividends or lump-sum taxes)
Production of Goods
bull What are goods good forbull ldquoTechnologyrdquo the Production FunctionY = zF( K Nd )ndash K and Nd are inputs or ldquofactors of producti
onrdquondash z is total factor productivitybull K is determined by past investmentbull Nd may be varied in the short run
Marginal Products MPN
bull Marginal product of labor (MPN) is the amount of additional output produced by adding an additional unit of Nd (holding K fixed)
Marginal Products MPK
bull Marginal product of capital (MPK) is the amount of additional output produced by adding an additional unit of K (holding Nd fixed)
Cobb-Douglas Production Fn
bull 1048698 Y = zKa (Nd)b
Assumptions about the productionfunction
bull 1 Constant returns to scale (CRS)Increasing production fnbull 2 uarrK or uarrNd causes uarrYEquivalent statement MPNgt0 MPKgt0
Diminishing marginal productsbull 3 MPN decreases as N increasesbull 4 MPK decreases as K increasesComplementarities in productionbull 5 MPN increases as K increases(and MPK increases as N increases)
bull Complementarities in prodrsquon
bull 5 MPN increases as K increases
(and MPK increases as N increases)
Figure 417 Adding Capital Increases the Marginal Product
of Labor
Whatrsquos z
bull 1048698 Total factor productivity represents level of
technology or efficiency in prodrsquon
Examples of z changes
ndash technological advance discovery of new techniquesetc
ndash Random economic shocks (weather)
ndash Inefficiency induced by govrsquot regulation
ndash Energy price shocks
Figure 418 Total Factor Productivity Increases
Figure 419 Effect of an Increase in Total Factor Productivity on the Marginal Product of Labor
The Objective of the Firm ishellip
MAXIMIZE PROFIT
Profit is
ndash Revenue minus costs
bull π = Y ndash wNd= zF( K Nd ) ndash wNd
Cobb-Douglas Production fn andthe Solow Residual
bull Y = zKa (Nd)bbull ndash Exhibits CRS if b = 1 ndash abull Theory says that share of Y paid to labor should
be 1-a 1 ndash a = wN Ybull Looking at data set 1 ndash a = 64 (a = 36)bull The ldquoSolow residualrdquo is measure of TFP (z)obtained this waybull z = Y ( K36 (Nd)64 )
Figure 420 The Solow Residual for the United States
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
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- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
-
Production of Goods
bull What are goods good forbull ldquoTechnologyrdquo the Production FunctionY = zF( K Nd )ndash K and Nd are inputs or ldquofactors of producti
onrdquondash z is total factor productivitybull K is determined by past investmentbull Nd may be varied in the short run
Marginal Products MPN
bull Marginal product of labor (MPN) is the amount of additional output produced by adding an additional unit of Nd (holding K fixed)
Marginal Products MPK
bull Marginal product of capital (MPK) is the amount of additional output produced by adding an additional unit of K (holding Nd fixed)
Cobb-Douglas Production Fn
bull 1048698 Y = zKa (Nd)b
Assumptions about the productionfunction
bull 1 Constant returns to scale (CRS)Increasing production fnbull 2 uarrK or uarrNd causes uarrYEquivalent statement MPNgt0 MPKgt0
Diminishing marginal productsbull 3 MPN decreases as N increasesbull 4 MPK decreases as K increasesComplementarities in productionbull 5 MPN increases as K increases(and MPK increases as N increases)
bull Complementarities in prodrsquon
bull 5 MPN increases as K increases
(and MPK increases as N increases)
Figure 417 Adding Capital Increases the Marginal Product
of Labor
Whatrsquos z
bull 1048698 Total factor productivity represents level of
technology or efficiency in prodrsquon
Examples of z changes
ndash technological advance discovery of new techniquesetc
ndash Random economic shocks (weather)
ndash Inefficiency induced by govrsquot regulation
ndash Energy price shocks
Figure 418 Total Factor Productivity Increases
Figure 419 Effect of an Increase in Total Factor Productivity on the Marginal Product of Labor
The Objective of the Firm ishellip
MAXIMIZE PROFIT
Profit is
ndash Revenue minus costs
bull π = Y ndash wNd= zF( K Nd ) ndash wNd
Cobb-Douglas Production fn andthe Solow Residual
bull Y = zKa (Nd)bbull ndash Exhibits CRS if b = 1 ndash abull Theory says that share of Y paid to labor should
be 1-a 1 ndash a = wN Ybull Looking at data set 1 ndash a = 64 (a = 36)bull The ldquoSolow residualrdquo is measure of TFP (z)obtained this waybull z = Y ( K36 (Nd)64 )
Figure 420 The Solow Residual for the United States
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
-
Marginal Products MPN
bull Marginal product of labor (MPN) is the amount of additional output produced by adding an additional unit of Nd (holding K fixed)
Marginal Products MPK
bull Marginal product of capital (MPK) is the amount of additional output produced by adding an additional unit of K (holding Nd fixed)
Cobb-Douglas Production Fn
bull 1048698 Y = zKa (Nd)b
Assumptions about the productionfunction
bull 1 Constant returns to scale (CRS)Increasing production fnbull 2 uarrK or uarrNd causes uarrYEquivalent statement MPNgt0 MPKgt0
Diminishing marginal productsbull 3 MPN decreases as N increasesbull 4 MPK decreases as K increasesComplementarities in productionbull 5 MPN increases as K increases(and MPK increases as N increases)
bull Complementarities in prodrsquon
bull 5 MPN increases as K increases
(and MPK increases as N increases)
Figure 417 Adding Capital Increases the Marginal Product
of Labor
Whatrsquos z
bull 1048698 Total factor productivity represents level of
technology or efficiency in prodrsquon
Examples of z changes
ndash technological advance discovery of new techniquesetc
ndash Random economic shocks (weather)
ndash Inefficiency induced by govrsquot regulation
ndash Energy price shocks
Figure 418 Total Factor Productivity Increases
Figure 419 Effect of an Increase in Total Factor Productivity on the Marginal Product of Labor
The Objective of the Firm ishellip
MAXIMIZE PROFIT
Profit is
ndash Revenue minus costs
bull π = Y ndash wNd= zF( K Nd ) ndash wNd
Cobb-Douglas Production fn andthe Solow Residual
bull Y = zKa (Nd)bbull ndash Exhibits CRS if b = 1 ndash abull Theory says that share of Y paid to labor should
be 1-a 1 ndash a = wN Ybull Looking at data set 1 ndash a = 64 (a = 36)bull The ldquoSolow residualrdquo is measure of TFP (z)obtained this waybull z = Y ( K36 (Nd)64 )
Figure 420 The Solow Residual for the United States
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
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- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
-
Marginal Products MPK
bull Marginal product of capital (MPK) is the amount of additional output produced by adding an additional unit of K (holding Nd fixed)
Cobb-Douglas Production Fn
bull 1048698 Y = zKa (Nd)b
Assumptions about the productionfunction
bull 1 Constant returns to scale (CRS)Increasing production fnbull 2 uarrK or uarrNd causes uarrYEquivalent statement MPNgt0 MPKgt0
Diminishing marginal productsbull 3 MPN decreases as N increasesbull 4 MPK decreases as K increasesComplementarities in productionbull 5 MPN increases as K increases(and MPK increases as N increases)
bull Complementarities in prodrsquon
bull 5 MPN increases as K increases
(and MPK increases as N increases)
Figure 417 Adding Capital Increases the Marginal Product
of Labor
Whatrsquos z
bull 1048698 Total factor productivity represents level of
technology or efficiency in prodrsquon
Examples of z changes
ndash technological advance discovery of new techniquesetc
ndash Random economic shocks (weather)
ndash Inefficiency induced by govrsquot regulation
ndash Energy price shocks
Figure 418 Total Factor Productivity Increases
Figure 419 Effect of an Increase in Total Factor Productivity on the Marginal Product of Labor
The Objective of the Firm ishellip
MAXIMIZE PROFIT
Profit is
ndash Revenue minus costs
bull π = Y ndash wNd= zF( K Nd ) ndash wNd
Cobb-Douglas Production fn andthe Solow Residual
bull Y = zKa (Nd)bbull ndash Exhibits CRS if b = 1 ndash abull Theory says that share of Y paid to labor should
be 1-a 1 ndash a = wN Ybull Looking at data set 1 ndash a = 64 (a = 36)bull The ldquoSolow residualrdquo is measure of TFP (z)obtained this waybull z = Y ( K36 (Nd)64 )
Figure 420 The Solow Residual for the United States
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
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- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
-
Cobb-Douglas Production Fn
bull 1048698 Y = zKa (Nd)b
Assumptions about the productionfunction
bull 1 Constant returns to scale (CRS)Increasing production fnbull 2 uarrK or uarrNd causes uarrYEquivalent statement MPNgt0 MPKgt0
Diminishing marginal productsbull 3 MPN decreases as N increasesbull 4 MPK decreases as K increasesComplementarities in productionbull 5 MPN increases as K increases(and MPK increases as N increases)
bull Complementarities in prodrsquon
bull 5 MPN increases as K increases
(and MPK increases as N increases)
Figure 417 Adding Capital Increases the Marginal Product
of Labor
Whatrsquos z
bull 1048698 Total factor productivity represents level of
technology or efficiency in prodrsquon
Examples of z changes
ndash technological advance discovery of new techniquesetc
ndash Random economic shocks (weather)
ndash Inefficiency induced by govrsquot regulation
ndash Energy price shocks
Figure 418 Total Factor Productivity Increases
Figure 419 Effect of an Increase in Total Factor Productivity on the Marginal Product of Labor
The Objective of the Firm ishellip
MAXIMIZE PROFIT
Profit is
ndash Revenue minus costs
bull π = Y ndash wNd= zF( K Nd ) ndash wNd
Cobb-Douglas Production fn andthe Solow Residual
bull Y = zKa (Nd)bbull ndash Exhibits CRS if b = 1 ndash abull Theory says that share of Y paid to labor should
be 1-a 1 ndash a = wN Ybull Looking at data set 1 ndash a = 64 (a = 36)bull The ldquoSolow residualrdquo is measure of TFP (z)obtained this waybull z = Y ( K36 (Nd)64 )
Figure 420 The Solow Residual for the United States
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
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- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
-
Assumptions about the productionfunction
bull 1 Constant returns to scale (CRS)Increasing production fnbull 2 uarrK or uarrNd causes uarrYEquivalent statement MPNgt0 MPKgt0
Diminishing marginal productsbull 3 MPN decreases as N increasesbull 4 MPK decreases as K increasesComplementarities in productionbull 5 MPN increases as K increases(and MPK increases as N increases)
bull Complementarities in prodrsquon
bull 5 MPN increases as K increases
(and MPK increases as N increases)
Figure 417 Adding Capital Increases the Marginal Product
of Labor
Whatrsquos z
bull 1048698 Total factor productivity represents level of
technology or efficiency in prodrsquon
Examples of z changes
ndash technological advance discovery of new techniquesetc
ndash Random economic shocks (weather)
ndash Inefficiency induced by govrsquot regulation
ndash Energy price shocks
Figure 418 Total Factor Productivity Increases
Figure 419 Effect of an Increase in Total Factor Productivity on the Marginal Product of Labor
The Objective of the Firm ishellip
MAXIMIZE PROFIT
Profit is
ndash Revenue minus costs
bull π = Y ndash wNd= zF( K Nd ) ndash wNd
Cobb-Douglas Production fn andthe Solow Residual
bull Y = zKa (Nd)bbull ndash Exhibits CRS if b = 1 ndash abull Theory says that share of Y paid to labor should
be 1-a 1 ndash a = wN Ybull Looking at data set 1 ndash a = 64 (a = 36)bull The ldquoSolow residualrdquo is measure of TFP (z)obtained this waybull z = Y ( K36 (Nd)64 )
Figure 420 The Solow Residual for the United States
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
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- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
-
bull Complementarities in prodrsquon
bull 5 MPN increases as K increases
(and MPK increases as N increases)
Figure 417 Adding Capital Increases the Marginal Product
of Labor
Whatrsquos z
bull 1048698 Total factor productivity represents level of
technology or efficiency in prodrsquon
Examples of z changes
ndash technological advance discovery of new techniquesetc
ndash Random economic shocks (weather)
ndash Inefficiency induced by govrsquot regulation
ndash Energy price shocks
Figure 418 Total Factor Productivity Increases
Figure 419 Effect of an Increase in Total Factor Productivity on the Marginal Product of Labor
The Objective of the Firm ishellip
MAXIMIZE PROFIT
Profit is
ndash Revenue minus costs
bull π = Y ndash wNd= zF( K Nd ) ndash wNd
Cobb-Douglas Production fn andthe Solow Residual
bull Y = zKa (Nd)bbull ndash Exhibits CRS if b = 1 ndash abull Theory says that share of Y paid to labor should
be 1-a 1 ndash a = wN Ybull Looking at data set 1 ndash a = 64 (a = 36)bull The ldquoSolow residualrdquo is measure of TFP (z)obtained this waybull z = Y ( K36 (Nd)64 )
Figure 420 The Solow Residual for the United States
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
-
Figure 417 Adding Capital Increases the Marginal Product
of Labor
Whatrsquos z
bull 1048698 Total factor productivity represents level of
technology or efficiency in prodrsquon
Examples of z changes
ndash technological advance discovery of new techniquesetc
ndash Random economic shocks (weather)
ndash Inefficiency induced by govrsquot regulation
ndash Energy price shocks
Figure 418 Total Factor Productivity Increases
Figure 419 Effect of an Increase in Total Factor Productivity on the Marginal Product of Labor
The Objective of the Firm ishellip
MAXIMIZE PROFIT
Profit is
ndash Revenue minus costs
bull π = Y ndash wNd= zF( K Nd ) ndash wNd
Cobb-Douglas Production fn andthe Solow Residual
bull Y = zKa (Nd)bbull ndash Exhibits CRS if b = 1 ndash abull Theory says that share of Y paid to labor should
be 1-a 1 ndash a = wN Ybull Looking at data set 1 ndash a = 64 (a = 36)bull The ldquoSolow residualrdquo is measure of TFP (z)obtained this waybull z = Y ( K36 (Nd)64 )
Figure 420 The Solow Residual for the United States
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
-
Whatrsquos z
bull 1048698 Total factor productivity represents level of
technology or efficiency in prodrsquon
Examples of z changes
ndash technological advance discovery of new techniquesetc
ndash Random economic shocks (weather)
ndash Inefficiency induced by govrsquot regulation
ndash Energy price shocks
Figure 418 Total Factor Productivity Increases
Figure 419 Effect of an Increase in Total Factor Productivity on the Marginal Product of Labor
The Objective of the Firm ishellip
MAXIMIZE PROFIT
Profit is
ndash Revenue minus costs
bull π = Y ndash wNd= zF( K Nd ) ndash wNd
Cobb-Douglas Production fn andthe Solow Residual
bull Y = zKa (Nd)bbull ndash Exhibits CRS if b = 1 ndash abull Theory says that share of Y paid to labor should
be 1-a 1 ndash a = wN Ybull Looking at data set 1 ndash a = 64 (a = 36)bull The ldquoSolow residualrdquo is measure of TFP (z)obtained this waybull z = Y ( K36 (Nd)64 )
Figure 420 The Solow Residual for the United States
- Slide 1
- Slide 2
- Slide 3
- Slide 4
- Slide 5
- Slide 6
- Slide 7
- Slide 8
- Slide 9
- Slide 10
- Slide 11
- Slide 12
- Slide 13
- Slide 14
- Slide 15
- Slide 16
- Slide 17
- Slide 18
- Slide 19
- Slide 20
- Slide 21
- Slide 22
- Slide 23
- Slide 24
- Slide 25
-
Figure 418 Total Factor Productivity Increases
Figure 419 Effect of an Increase in Total Factor Productivity on the Marginal Product of Labor
The Objective of the Firm ishellip
MAXIMIZE PROFIT
Profit is
ndash Revenue minus costs
bull π = Y ndash wNd= zF( K Nd ) ndash wNd
Cobb-Douglas Production fn andthe Solow Residual
bull Y = zKa (Nd)bbull ndash Exhibits CRS if b = 1 ndash abull Theory says that share of Y paid to labor should
be 1-a 1 ndash a = wN Ybull Looking at data set 1 ndash a = 64 (a = 36)bull The ldquoSolow residualrdquo is measure of TFP (z)obtained this waybull z = Y ( K36 (Nd)64 )
Figure 420 The Solow Residual for the United States
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Figure 419 Effect of an Increase in Total Factor Productivity on the Marginal Product of Labor
The Objective of the Firm ishellip
MAXIMIZE PROFIT
Profit is
ndash Revenue minus costs
bull π = Y ndash wNd= zF( K Nd ) ndash wNd
Cobb-Douglas Production fn andthe Solow Residual
bull Y = zKa (Nd)bbull ndash Exhibits CRS if b = 1 ndash abull Theory says that share of Y paid to labor should
be 1-a 1 ndash a = wN Ybull Looking at data set 1 ndash a = 64 (a = 36)bull The ldquoSolow residualrdquo is measure of TFP (z)obtained this waybull z = Y ( K36 (Nd)64 )
Figure 420 The Solow Residual for the United States
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The Objective of the Firm ishellip
MAXIMIZE PROFIT
Profit is
ndash Revenue minus costs
bull π = Y ndash wNd= zF( K Nd ) ndash wNd
Cobb-Douglas Production fn andthe Solow Residual
bull Y = zKa (Nd)bbull ndash Exhibits CRS if b = 1 ndash abull Theory says that share of Y paid to labor should
be 1-a 1 ndash a = wN Ybull Looking at data set 1 ndash a = 64 (a = 36)bull The ldquoSolow residualrdquo is measure of TFP (z)obtained this waybull z = Y ( K36 (Nd)64 )
Figure 420 The Solow Residual for the United States
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-
Cobb-Douglas Production fn andthe Solow Residual
bull Y = zKa (Nd)bbull ndash Exhibits CRS if b = 1 ndash abull Theory says that share of Y paid to labor should
be 1-a 1 ndash a = wN Ybull Looking at data set 1 ndash a = 64 (a = 36)bull The ldquoSolow residualrdquo is measure of TFP (z)obtained this waybull z = Y ( K36 (Nd)64 )
Figure 420 The Solow Residual for the United States
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Figure 420 The Solow Residual for the United States
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