2013 Macro Qualifier (June) "The ate two parts, They are equally weighted Follow the wtructions given fr each pat. You the ue art 1 1. Consider the flowing growth moval whore ie planar ehooss soquenas of eonsimption in ondcrte max Spa, ne Sha salt, 120, moe uppne at bo sca 0) nd cae pre oe ne = 1th wobbly 0 and 3 ~ 2 with probable 06 () Setup th Bln faetona equoton sag 2,4) athe state variables (&) Solve fox the sve funtion and tbe pliey fection. (Pleas make as ach progres at yovean)2, Bach prod an uoenpayed worker eivr a wage offer of w ate dan Bom aed Fe), ‘Thee draw ae id. ver tne andthe sxpport of Pe) the st [o, wth FO) ~ 0 Ske Bas the opion of acepling or easing the offer Ise eels the oil, i rele Tnemplovment bene + € 1), she stays nnemployed ant ws next pened to daw lothee wa ofr i abe aorots the afer, tbeBoeamos employed freer al her casas ‘sual in-ach period and whe dove nck get uy more wage slr. The weer rani eX, where Ee the enpectatlon orator conditional on information in perio cy egult wf he werk Ss employed: I unemplajd, cy agate = (0) Swopone Set Hat he mnemplyient benet = ir xa. Wit the work's Bliman ‘quntion. (©) Suppote now eat the work i nied to unemploynont Benet # > 0 oaly dung the et period that shew snempoped, Wate te Balai oqution i his eas (6) Compare the reevaton wages end tho probable of eocpting sx oer obtain in pars (e) and (2)? Bolan2013 Macro Qualifier (June) Part 2 ‘Thore aro three questions. Answer all of them, “The economy consists of « contimmnm of monopolistic fms indexed by i ¢ [0,1] and the representative household, Bach menopolistic firm produces a differentiated product. The household maximizes the expected lifetime uty defined as Gc is the consumption good defined as a-(eua)* ‘where Ci) i the quantity of good é consumed by the household in period t. The houselold ‘also invests. ‘The capital accumulation rlois given by Kua 1-8) Ket Xe Xe is the investment good defined as no ([ na) ‘whore X; (i isthe quantity of good ‘invested in pesiod f. The household purchases diferen- ‘tinted goods for consumption and investimont, i, it chooses C, (i fr all € [0,1] and X, (@) forall: € (0,1), and then, produoas C; and X- in the home. ‘The flow budgot constraint is sven by [roanes [roxwd=nKon Fi) isthe price of intermodiate good i, isthe rental price of capital, and 7, is dividends ‘id by monopolistic firms, all of which are taken as given by the household. Notice that ‘there is no price discrimination betwoen investment and eonsumnption demand, and there is no labor in this economy. Question 1 (houseliold’s cost minimization problems): Suppose that the household wants 60 eonuae C, wails of eamuaplion good. "The houschold, of course, wants to achieve this ‘goal at minimum cost; soit solves the following ecst minimization problem: wn finosia s (feo ‘oi on i en eps. nner elie ns cal1. Show that Pai) Gy Ban (Ea) 2. Rewrite the Sst ordar onion inthe previo question i the following way: a= (28) "aw By substituting it into the constraint, show that the following relation holds: (sn) au ({n0"~4)* = 3. Show that the demand to intermediate good j for consumption parpose is given by hold forall, € (0,1. GH) a) where Pais dein as Pu = [ff Fal? al] 4. By substituting (1) into the objective function, show thatthe following relation holds [rociunrne 5. Suppose that the household wants to invest X, units of investment good. Show that the demand to intermediate good j for investment purpose s given by x= (42) "x i ROM, 4] . and the following relation also holds: where Pais defined 35 Po [ROX Me = Pax fet refer tthe eee previo aut shorten your awe uation 2 (firm's profit maximization problem}: Intermediate goods are prodoed using ‘epital K;(), and the production function is Linoar, ¥, (i) = AUK, (@). Tho intermediate ‘evods firm sets price (i) to maximize profits: ae (a o- %) (G+ XO} 2subject to the demand constraints a= (22) xio- (22 Asie the following questions 1. Derive the following relation from the frst ondor condition for the profit maximizing Pega em) +(A00-%) (-09 nt) 2. Intuitively argue why (2) is a necessary condition for profit maximization. e Question 8 (equbrium properties): We restiet our atention toa symmetric equim in which all firms change the same price P,. Answer the following questions. 1, Show that holds in the equilibrium. 2. Show that aa-a Xil)= Xe forall [0,1] hol in the equilibrium, ‘8. Show that inthe oqiirium, P; satis the following relationship: 8=(Sapateenx) (2) 4. The provious quostion shows that the markup in this economy is endogenous. Let Yj denote the agategate output defined as ¥; = O;+X;. Let s¢ denote the investinent share in the aggregate output, je. s¢=X./¥i. Show that the markup is rewritten as o(l-)-+nm 5. Gali reportod in his 1094 paper that in the data, the investment share is negatively correlated with the size of markups at the aggregate level. Under what oudition 's the theoty of endogenous markup you just derived consistent with this empirical observation? 6. Give an intuition to the condition you just found in the provious question: why in the model economy with that condition satisiod, do firms decresse the markup when investment share is high?