Posted on

You are running a small yard maintenance business for the summer Answer

  • You are running a small yard maintenance business for the summer. What do you expect to happen to the number of yards you can maintain in a day as you add workers if you don’t purchase more capital equipment (like mowers and leaf blowers)? Provide at least two (2) supporting facts to support your response.

 

  1. Using the real business cycle theory, explain two (2) effects of an adverse technological shock on the labor market and on the output market.
  2. Suppose you were interested in increasing technological progress in your country. Suggest two (2) ways to do this.

 

Answer

  1. You are running a small yard maintenance business for the summer. What do you expect to happen to the number of yards you can maintain in a day as you add workers if you don’t purchase more capital equipment (like mowers and leaf blowers)? Provide at least two (2) supporting facts to support your response.

I would expect that the number of yards that can be maintained in a day will go up, then down as you reach the limit of capital allocation (mowers, blowers, etc.). There are a number of variables in determining the number of yards that can be maintained, but the question asks us to look at only two. As long as there is equipment for employees, additional employees add to productivity. Once all equipment is assigned, additional employees are unnecessary (they just stand around – fact 1) and there is no efficiency to be gained (the equipment is fully utilized – fact 2).

  1. Using the real business cycle theory, explain two (2) effects of an adverse technological shock on the labor market and on the output market.

The real business cycle model claims that changes in technology, typically called technology shocks, cause most changes in real GDP, in both the short run and the long run. When productivity falls, the growth rate of real GDP turns negative as the technological shock is felt throughout the economy.

If the return on labor is less after a technology shock, people will work less.

People will substitute leisure time for productivity time. Or, unemployment will rise if labor rates can not be reduced (i.e. union contracts, etc.).

Output will also be affected by a negative technology shock. Reduced labor rates will cause reduced demand for goods. Reduced rates for goods will cause financial frictions, loan losses (which will restrict future credit supply in response)

 

  1. Suppose you were interested in increasing technological progress in your country. Suggest two (2) ways to do this.

Governments have long sought to subsidize technological growth, as a way of improving the standard of living of all its citizens. Subsidizing private sector invention, by protecting the effort through tax credits and patent protection, provides incentives for new products and services to be brought to market. Secondly, supporting innovation (new ways of doing something that increases productivity) allows for larger increases in technological progress. Government tax credits, patents, licenses to support the entrepreneurial effort (protecting the demand for the new process) are all techniques that can spur innovation.