Chapter 4 Quiz

Suppose India has a per capita GDP that is .074 times the United States GDP. It has a capital-per-person ratio that is .035 times that of the United States. Compared to the United States, the implied value of total factor productivity for India is approximately...

.23; The United States is standardized to a value of 1 in this problem. The implied value of TFP is equal to the ratio of output per person divided by the capital-to-labor ratio raised to the 1/3 power.

Output per capita and output per worker are - always equal - equal in production model, but output per capita is smaller in general - equal in general, but output per capita is smaller in production model - are not equal, because output per capita is always greater

B; Note that in the production model output per capita and output per worker are equal, but this need not be the case in all models. Given that you cannot have more laborers in an economy than its population, output per capita is smaller than output per worker.

Which of the following is included in TFP? - amount of labor - amount of capital - quality of labor - all are correct

C: because TFP represents the residual, it includes anything not explicitly in the mathematical model. the labor quality are not explicitly included in the model and thus are in TFP

In the production model from the text, which of the following is NOT an exogenous variable or a parameter? - supply of capital - supply of labor - amount of capital - productivity parameter

C; The amount of capital used in production is an unknown endogenous variable that must be solved for. The other three options are parameters.

If the productivity parameter is assumed to equal 1, the production model - correctly identifies countries are richer if they have more capital - incorrectly predicts that poor countries are richer than they are - incorrectly predicts that some countries are richer than the US - all are correct

D; The model implies that more capital implies more output per person but incorrectly overestimates the value of per capita output.

Output per person is higher when - a country is more efficient - a country has a higher capital to population ratio - a country has stronger property rights - all are correct

D; a country has higher per capita output if capital per person and the productivity parameter are higher. the productivity parameter is higher under better institutions and when technologies are adopted more efficiently

according to figure 4.5, does the production model accurately predict the level of per capita GDP for Singapore?

Yes, because the predicted value of per capita GDP for Singapore is close to the actual value of its per capita GDP

a firm uses capital and labor to produce a good. which of the following is greatest? - accounting or economic profit

accounting profit; = total revenue - payments to inputs other than capital

a production function has inputs x,y, and z and a productivity parameter A(bar). the production function A^1/3 * X^1/3 * Y^1/3 *Z^1/3 exhibits...

constant returns to scale; doubling each input will result in a doubling of output. if the exponents on the inputs sum to 1, it has constant returns to scale

T/F: We cannot tell whether the production function Y = K^a * L^(1-a) has constant returns to scale, because we do not know the value of a.

false: the Cobb-Douglas production function has constant returns to scale because the exponents a+(1-a) sum to 1

T/F: if the marginal product of capital is less than the rental rate of capital, the firm should rent more capital

false; a firm should only rent more capital if the MPK is greater than the rental rate of capital

T/F: The standard replication argument implies that Italy can raise its per capita GDP by doubling the amount of capital per person.

false; capital per person is subject to diminishing returns to capital. thus, because exponent on capital per person is less than 1, doubling only the amount of capital per person will not double per capita output

T/F: capital per person explains about 1/2 of the difference in per capita income between the richest and poorest countries

false; the capital to population ratio explains about 1/3 of the difference while TFP explains the rest

T/F: You plot the production function for the United States on a graph with output per person on the vertical axis and capital per person on the horizontal axis. If a shock occurs causing the productivity parameter to increase, the production function would shift upward

true: a higher productivity parameter implies that US production (output per person) is higher for any given level of capital per person

T/F: In a Cobb-Douglas production function, the factor share of income going to each input is equal to the exponent on the input in the production function.

true; regardless of the amount of capital or labor in an economy, the exponents in the production function determine the factor shares