2) Assume that US production is described by a Cobb-Douglas production function. A) Assume that total factor productivity has declined.
2) Assume that US production is described by a Cobb-Douglas production function.
A) Assume that total factor productivity has declined. On the graph below, show how this decline in productivity will affect the production function (with labor supply on the X-axis). What happens to the marginal product of labor after the productivity decline?
B) Now assume that the decline in productivity also causes household wealth to decline. On the graph below, show what happened to equilibrium employment and the real wage rate in response to the adverse productivity shock in part A and the subsequent decline in household wealth. Explain your answer.
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