History of economic thought HW

4. Two streams of economic thought find their origin in Adam Smith’s Wealth of Nations. These are the stream that focused on individualism and utility maximization that culminated in the “neoclassical revolution” and the stream that focused on classes and the labor theory of value that culminated in Marxian economics. Summarize the key elements of these two streams of thought. Show how these streams of economic thought draw on elements of Adam Smith’s theory. Then describe the different policy prescriptions that flow out of the two streams of thought.

5. John Maynard Keynes was critical of the neoclassical or classical school of thought, especially around the issue of Say’s Law. Explain Say’s Law. Explain why it is important in classical/neoclassical thought. Summarize Keynes’ critique of Say’s Law. Then explain how, based on this critique, Keynes could argue that monetary policy was not always sufficient to address a deflationary gap in the economy and that discretionary fiscal policy might be needed to close the gap. III. Problems

1. Consider the following production situation from the Marxist perspective. Fill in the attached sheet with the requested entries for each case.

Assumptions for Case 1: The standard workday is 10 hours. The combination of productive commodities needed to produce dishwashers: 10 tons of steel plus 5 tons of plastic plus 150 labor-powers produce 300 dishwashers. A worker's daily means of subsistence consists of two "Big Macs", one tent, and one pair of shoes.

The following values are given:

Assumptions for Case 2: Assume that the value of A Big Mac rises to 2 hours instead of 1 hour/ Everything else remains as in Case 1. Recompute and record all entries requested in the answer sheet.

Assumptions for Case 3: Begin with Case 1. Now assume that the length of the workday is shortened to 8 hours instead of 10 hours. Everything else remains the same. Recompute and record all entries requested in the answer sheet. Hint: Be careful to note that additional labor-powers will now have to be purchased to keep production at the same level as before.

2. Ricardian Corn Theory of Rent

Assume that there are parcels of land with three levels of fertility. There are 300 acres of quality 1 land that produces 200 bushels of corn per acre with one dose of labor-capital. There are 200 acres of quality 2 land that produces 150 bushels of corn per acres with one dose of labor capital. There are 100 acres of land of quality 3, which produces 100 bushels of corn per acre with one dose of labor capital. Assume that only one dose of labor-capital can be applied to each acre of land. One dose of labor-capital includes 1 worker working for a year. The subsistence level of consumption for a worker is 75 bushels of corn per year.

Now assume that population is such that 75000 bushels of corn are required. In the simplest case, what will be the distribution of value of the bushels of corn (i.e., how many bushel equivalents do the landlords, capitalists, and workers receive)? What percentage of the total production goes to each class?

Now assume that the population grows such that 95000 bushels are now required. How many bushel-equivalents does each class receive? What percentage of the total production goes to each class?

3. Ricardian Value and Price

Assume two production processes, each of which produces 200 units of output. The first (X) produces its output by combining 500 labor units of capital with 100 labor units of labor. The second (Y) produces with 100 labor units of capital and 500 labor units of labor. The wage rate is assumed to be $1 per unit of labor. The rate of profit is 0.2.

Now assume that the capital, which is used in X, is divided by vintage into 300 units two years before and 200 in the year before. The capital that is used in Y is entirely produced the year before.

Calculate the price of one unit of X and one unit of Y.

Now assume that the wage rate rises to $2 per unit of labor and that the rate of profit falls to 0.1. Recalculate the prices of X and Y.

What has happened to the relative price of the two commodities?

4. Assume the following schedules of marginal utility for an individual.

a. If the price of apples is $2 each and the price of a loaf of bread is $1 each and the budget of the individual is $13, what would make up the market basket of the individual?

b. If the person’s budget rose to $20, what would be in the market basket of the individual?

c. Explain, for both a and b, why you selected these bundles.