ECON 2D03 Study Guide - Quiz Guide: Production Function, Capital Intensity, Demand Curve

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7 Jan 2014

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If a part of a statement is false, then the whole statement is false. Use scan sheet to circle a if the statement is true (t) and circle b if the statement is false (f). In this economy, higher level of output per labour requires higher capital-labour ratio. The production function in an economy is y = k1/2, where y is the output per labour and k is the capital labour ratio. If k increases by 20 percent in this economy, then labour productivity also increases by 20 percent. High labour productivity is associated high investment per person, high saving person and high capital intensity per person. On the other hand, high rate of population growth is associated with low levels of income per person. Consider solow growth model in two economies, a and b. Both economies are identical in all respects, except marginal propensity to save (mps).

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Explain whether the statements below is True or False.

A6-2. If an aggregate production function exhibits diminishing marginal product and constant returns to scale then a doubling of the labour force leads to a doubling of aggregate output.

A6-3. Neoclassical growth theory tells us that the widespread adoption of new technologies will increase potential GDP and potential GDP per worker.

A6-6. An economy that is open to capital flows has two channels for the monetary transmission mechanism, while an economy closed to capital flows has only one. [Hint: Explain in the context of an increase in interest rates in both types of economies.]

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5 . Consider an economy described by the production function: Y = F(K; L) = K^.32^.68 : a) What is the per-worker production function? b) Find the steady-state capital stock per worker, and consumption per worker as a function of the saving rate and the depreciation rate. (In other words, instead of using numbers for s and , you just keep them as part of the expression.) c) Assume that the depreciation rate is 7.5 percent a year. Make a table showing steady-state capital per worker, output per worker, and consumption per worker for saving rates of 0 percent, 10 percent, 20 percent, 30 percent and so on until 100 percent. (You will need a calculator with an exponent key for this, you can also use Excel.) Which saving rate maximizes output per worker? Which saving rate maximizes consumption per worker?

Suppose the output per effective worker is production function is y=10k^1/2, where k equals the amount of capital per effective worker and the capital lasts an average of 10 years. Assume that the saving rate is 32 percent, the rate of growth of population is 4 percent and the rate of technological growth is 2 percent.

a) Solve for the steady state levels of capital per effective worker, output per effective worker, investment per effective worker and consumption per effective worker.

b) Calculate the growth rate of total capital income and the growth rate of total labor income at the steady state.(Hint: Capital and labor each earn a constant share of the economy's income ).

c) Prove, at the steady state, (i) the capital-output ratio is constant;(ii) the real wage grows at the rate of 2 percent.

d) Calculate all of the following at their Golden Rule levels: Capital per effective worker, output per effective worker, saving and investment per effective worker, and the consumption per effective worker.

e) Whether the saving rate is too high or too low?

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ECON 2D03 Study Guide - Quiz Guide: Production Function, Capital Intensity, Demand Curve

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