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Effects of Human Capital

True, False, or Uncertain: State whether the following statements are true, false, or uncertain, and explain why.

  1. [3 points] If unemployed workers become discouraged, then the official unemployment rate will not change.
  2. [3 points] High transaction costs (e.g., specifying job tasks in detail) and the importance of specific human capital (i.e., skills acquired on the job) are typically responsible for firms’ preferences in hiring employees rather than independent contractors.

Problems: Answer the following questions. In order to receive full marks, all intermediate work leading to the final answer must be shown.

  1. Consider a firm which sells output and buys labor in a competitive market. The firm’s production function is given by