1. (6 points) In the essay, "Economic Possibilities for Our Grandchildren," written in 1930, John Maynard Keynes predicted that economic growth we would "in a hundred years . . . [be] eight times better off in the economic sense than we are today." In 2015, U.S. real GDP per capita was 6.4 times larger than in 1930, andwith 15 years to 2030, it looks like he made a very good prediction. The secondpart of his prediction has proved less accurate. Keynes envisioned that we would beso rich by 2030 that it would only be necessary to work "three-hour shifts or afifteen-hour week," yet the average American still works about 35 hours a week.Using the labor demand and labor supply model, and substitution and income effects, explain what Keynes assumed about the relative importance substitution and income effects that caused this prediction about very short work weeks to be inaccurate.
2. (4 points) Using the perfectly competitive labor demand and labor supply model,what would happen, all else equal, to the real wage and the number of workers in each of the cases below:
A. There is an increase in the amount of physical capital as a result of positive net investment in the economy.
B. In a particular occupation, workplace safety regulations are effective inlowering the rate of workplace accidents and injuries.
C. In a particular occupation, the good that workers are producing is not aspopular as it once was, leading to a decrease in the price of the good thatworkers help produce
D. Social Security retirement benefits are cut and the retirement age is increased.