First Practice Exam – C Intermediate Macroeconomics

1. Show and explain why P·MPN=W is the profit maximizing condition for a perfectly competitive firm.

2. Using the indifference curve model, show and explain how an increase in tax rates affects the labor supply curve when the income effect dominates the substitution effect [Be sure to explain both the substitution and income effects!].

3. From “Productivity up in 2004" South Bend Tribune (Associated Press) February 5, 2005:

“The productivity of American workers rose 4.1% in 2004. Productivity, the amount of output produced for each hour of work, is the key factor in boosting living standards because it allows companies to pay their workers more based on their increased efficiency without having to raise the prices of their products, which would increase inflation."

"The downside of that increased efficiency is that companies, by getting more output from their existing work force, are able to avoid hiring new workers."

Using the classical model, show and explain whether or not the statements in the first and second paragraphs above are correct. [Note that the article does not mention the source of the increased productivity – you must come up with a reason why it increased in order to answer the question.]

4. The number of live births in the U.S. surpassed 4 million children in the late 1950s and early 1960s. That number was not surpassed again until 1986 when the children born in this earlier period began having their children. Using the classical model, show and explain how this will affect the labor force, output and real wages in that latter part of this decade (2005-2010).