Econ 3133 Chapter 5

What are the distinguishing characteristics of a Cobb-Douglas Production system

-Exhibits diminishing returns -constant returns to scale -Capital and labor both earn shares of total income equal to the value of their exponents in the production function.

Which of the following equations best represents the concept of constant returns to​ scale?

3Y​ = AF​(3K​, 3L​)

Which of the following would be the least likely to increase total factor​ productivity?

Government control of production and property

The relationship between the inputs employed by a firm and the maximum output it can produce with those inputs is called the​ firm's

Production function

With the​ Cobb-Douglas production​ function, Y=AK1/4L3/4​, if both capital and labor increase by 60​%, what will happen to real​ GDP?

Real GDP will increase by exactly 60​%.

The aggregate production function is an equation that shows the relationship between​ ________ and​ ________.

The inputs employed by​ firms; the maximum output firms can produce with those inputs

Which of the following equations best represents a​ Cobb-Douglas production​ function?

Y=AK^3/4 L^1/4

​"Without a​ well-functioning financial​ system, it is not possible for an economy to reach its full potential for real GDP per​ capita." Briefly explain whether you agree with this statement.

Yes, without a​ well-functioning financial​ system, saving cannot easily be pooled to fund investment.​ Thus, an​ economy's real GDP per capita will be lower than its full potential.

In the aggregate production​ function, Y represents real​ GDP, K represents the capital​ stock, L represents the quantity of​ labor, and A represents an index of efficiency. Which of the following equations represents the aggregate production​ function?

Y​ = AF​(K​, L​)

An increase in foreign investment in​ Brazil's mining industry will increase the capital stock in Brazil. All else​ equal, as the capital stock​ increases, the marginal product of capital ​(​MPK) will

decrease due to diminishing marginal returns.

The marginal product of capital is the​ ________ curve for capital and the marginal product of labor is the​ ________ curve for labor.

demand; demand

All else​ equal, an increase in labor hours will cause a

movement up and to the right along PF1.

If the nominal rental price of capital divided by the price of output is less than the marginal product of​ capital, a firm that wishes to maximize profits will?

purchase more capital goods.

A firm that wishes to maximize profits will continue to hire labor until the

real wage​ = MPL.

All else​ equal, an increase in the capital stock will cause a

shift from PF1 to PF2.

All else​ equal, continued increases in the labor supply in an economy will lead to

smaller increases in real GDP.

The two factors determining labor productivity are

the capital-labor ratio and total factor productivity.

Firms decide the amount of labor and capital to use in production by employing inputs to the point where

the real wage equals the marginal product of labor and the real rental price of capital equals the marginal product of capital.

The standard of living ultimately depends on labor productivity because

there is no limit to how much labor productivity can increase. & limits exist to the input of labor​ (the number of​ workers).

Diminishing marginal returns do not exist for increases in

total factor productivity.

All else​ equal, if the demand for labor increases and the supply of labor does not​ change, the equilibrium real wage will​ ________ and the equilibrium quantity of labor will​ ________.

​increase; not change

The marginal product of capital is always​ ________ and it​ ________ as the capital stock increases.

​positive; decreases