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Preference Shocks and Production Shocks. Suppose that firms and consumers co-exist in the static (one-period) consumption-leisure model. The representative firm uses only labor to produce its output good, which the representative consumer uses for consumption. Suppose the production function is linear in labor, so that output of the firm is given by A  n , where A is a production function shock (aka, exogenous total factor productivity). Suppose there are no taxes of any kind, and the consumer’s utility function is given by u ( Bc, l ) (the function u satisfies all the usual properties we assume for utility functions), with the exogenous parameter B denoting a preference shifter. Finally, the real wage is given by w = A . a. Briefly explain why the real wage is given by w = A . For each of the following three questions, clearly sketch your

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