Production function: Y=3K^.5L^.5
Labor (L) is 400 units
Capital (K) is 100 units
Taxes (T) are 200
Government Spending (G) is 100
Marginal Propensity to Consume is .6
Investment is determined by the following function: I(r) = 1000- 100r
where r is real interest rate.
a) Show that the production function is constant returns to scale.
b) Which variables are endogenous? Exogenous?
c) How much is Y?
d) Express MPL in terms of L and K.
e) Express MPL in terms of L and K.
f) Using the actual number of units of L and K and your answers in (c) and (d), how much is the real wage and real rent?
g) Write out the full formula, Y=c(Y-T)+I+G, What are the equilibrium values of C, I and r?
h) How much are Public savings? Private savings and National Savings?
i) Graph the loanable funds market (Investment Demand and National Savings)
j) If Government spending increases to 150, how does that effect your answers to part e, f, g and h?
k) If L increases by 5 how much does C, I and r change by?