Concordia University
Department of Economics
Econ 303 – Intermediate Macroeconomics I, Midterm Exam
Fall 2024
STUDENT NAME:_________________
STUDENT ID:_____________________
Instructions (PLEASE READ): This exam has three parts:
1) Questions 1,2,3 are mandatory.
2) Choose question 4 or question 5. Only one answer will be graded.
3) The last question is a BONUS question.
Answer all parts of a chosen question; any unanswered part will receive zero
marks.
Start by defining the main concepts in the question, state and explain all your
assumptions, formulate a clear answer; provide an example, whenever suitable.
If you draw graphs, clearly mark all the axes, curves, and relevant variables. If you
write formulas, explain the significance of the symbols/variables used.
Show your calculations.
You may write with pen or pencil.
Time permitted is 75 minutes. Non-programmable calculators and dictionaries
are allowed.
1. Statistics Canada publishes data on the Canadian labour market by industry or
occupations, including geographical and demographic characteristics.
For the category “Health occupations”, in the province of Quebec, the average
hourly real wage was $23.24 in 2022 and $20.23 in 2024. Despite of the decrease
in the real wage, employment has increased for this category of occupations.
Discuss the substitution and income effects of the change in the real wage in this
case, using the model discussed in class.(10 points)
2. Consider an economy in which the representative consumer’s marginal rate of
substitution between leisure 𝑙 and consumption 𝑐 is 𝑀𝑅𝑆!,# = 2𝑐, meaning that
the relative price of leisure in terms of consumption goods is 2𝑐. The
representative firm’s production function is 𝑌 = 𝑧𝑁 where 𝑁 is labour demand
and 𝑧 is total factor productivity. The consumer has one unit of time to allocate to
leisure or work, that is ℎ = 1. There is no government in the economy and
therefore no taxes and no government expenditure, i.e. 𝑇 = 𝐺 = 0. Suppose
that 𝑧 = 3.
a.
At the equilibrium, the following conditions must hold: 𝑀𝑅𝑆!,# = 𝑀𝑃𝑁
and 𝑌 = 𝑐. Explain in detail why these two conditions give the best possible
allocation in this economy. (5 points)
b.
Calculate equilibrium levels of consumption and leisure. (5 points)
c.
How much profit does the firm make at the equilibrium? (5 points)
d.
"The 2024 federal budget justifies the increased capital-gains (tax) rate
(from one-half to two-thirds) on fairness grounds, asserting that only 0.13 per
cent of Canadians with the highest incomes are expected to realize gains
exceeding the $250,000 annual threshold. [...] it is now apparent the capital-gains
tax increase will adversely affect many ordinary Canadians as well." (The Globe
and Mail, May 2024).
Explain the adverse effect of this policy on the welfare of taxpayers, on
government revenues and the overall government budget. Start by explaining
the role of government policy. (5 points)
Choose between Question 3, Question 4 or Question 5. Only one question will
be graded.
3. Suppose the economy consists of two countries, East and West, which are
denoted by E and W, respectively. The two countries do not trade with each
other. Moreover, both islands have access to the same production technology
𝑌 = 𝑧𝐾 $.& 𝑁 $.' ,
where 𝑧 is total factor productivity, 𝑌 is output of consumption goods, 𝐾 is the
quantity of capital input and 𝑁 is the quantity of labour input measured as hours
worked. Notice that the production function exhibits constant returns to scale.
Let 𝐾𝐸 and 𝐾𝑊 denote the quantities of capital in E and W, respectively.
2
Suppose that 𝐾𝑊 = 2𝐾𝐸 . The capital and the labour force cannot flow between
the two countries. Therefore, they are closed economies. The population size is
the same between the islands and all agents share the same utility function.
There is no government in any of the two countries. Making all necessary
assumptions, answer the following questions:
a.
Plot the outputs of the two countries as a function of the quantity of
labour and compare them in a single graph. For a given quantity of labour,
which country has higher marginal productivity of labour? (10 points)
b.
Explain why, at the equilibrium, employees of country East will work
more to obtain the same output as in country West. (10 points)
4. Consider the one-period macroeconomic model studied in chapter 5.
The representative consumer allocates his/her time between work and leisure;
the consumer works 𝑁 ( hours and receives 𝑤 units of consumption goods. The
second source of income for the consumer is profits distributed as dividends (𝜋)
from the representative firm.
The representative firm owns capital and hires labour to produce consumption
goods. The goal of the firm is to choose the labour input (𝑁 ) ) that allows it to
maximize profits.
a.
What are three factors that determine labour supply? In order words,
construct a labour supply function. (10 points)
b.
Suppose that the government imposes tax on the representative
consumer’s dividend income. That is, the consumer’s dividend income is
𝜋(1 − 𝑡 ) ), where 𝑡 ) is the tax rate. What effect does the income tax have on
consumption and labour supply? (Think in terms of how consumer’s budget and
the equilibrium in the labour market are affected). (10 points)
5. Consider an economy in which the representative consumer has preferences over
leisure (𝑙) and consumption (𝐶) described by the utility function
𝑈(𝐶, 𝑙) = 𝐶 */& 𝑙*/&
This consumer has ℎ units of time at his disposal. The representative firm’s
production function is 𝑌 = 𝑧𝑁𝐾 in which 𝑁 is labour demand, 𝐾 is the value of
capital stock, and 𝑧 is total factor productivity.
a.
How many units of consumption, is this consumer willing to give up, at
the margin, to enjoy more leisure? Explain. (10 points)
b.
What is firm’s marginal product of labour (𝑀𝑃𝑁)? Explain why this firm
maximizes profits when 𝑤 = 𝑀𝑃𝑁. Should this firm increase or decrease its
labour demand 𝑁 when the real wage is smaller than the marginal productivity
of labour? (10 points)
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