Econ Hw 7

What is a patent? A. A patent is a tax on specific firms (ex: tobacco companies). B. A patent is a trademark (ex: Nike logo). C. A patent occurs at the steady state output. D. None of these answers.

Correct. A patent is a temporary, government-created monopoly that gives the inventor the sole right to use his or her idea for a fixed number of years. Points Earned: 1/1 Correct Answer: D

Three countries have different amounts of K. The country of Ilia has 100 machines, the country of Caplania has 10,000 machines and the country of Hansonia has 1,000,000 machines. These three countries produce GDP in the same manner: Y = 5 and devote 25 percent of GDP to making investment goods (so =0.25). What is the amount of savings in these three countries? A. Ilia: 10 units of output; Caplania: 100 units of output; Hansonia: 1,000 units of output. B. Ilia: 12.5 units of output; Caplania: 125 units of output; Hansonia: 1,250 units of output. C. Ilia: 12.5 units of output; Caplania: 125 units of output; Hansonia: 12,500 units of output. D. Ilia: 1.25 units of output; Caplania: 125 units of output;Hansonia: 1,250 units of output

Correct. A successful economy needs to continually replenish its capital stock just to keep going. This is one of the reasons why savings in an economy is so important. Points Earned: 1/1 Correct Answer: B

After World War II, a high proportion of France's capital stock was destroyed, but it had educated workers and a market-oriented economy. How would the usage of one more unit of capital affect the marginal product of capital in France, post World War II? A. The war increased France's marginal product of capital. B. The war decreased France's marginal product of capital. C. The war did nothing to France's marginal product of capital. D. None of these answers.

Correct. After World War II, France was probably on the lower part of its production function, which means that one more machine creates a lot of output. Points Earned: 1/1 Correct Answer: A

Compared to its fast growth today, is China's economy likely to grow faster or slower in the future? A. China is likely to grow faster in the future because as capital accumulates the marginal product of capital diminishes. B. China is likely to grow faster in the future because as capital accumulates the marginal product of capital increases. C. China is likely to grow slower in the future because as capital accumulates the marginal product of capital diminishes. D. China is likely to grow slower in the future because as capital accumulates the marginal product of capital increases.

Correct. As capital accumulates, the return on capital diminishes. China will have to grow by inventing new ideas rather than imitating and improving on existing ideas. Points Earned: 1/1 Correct Answer: C

Many inventors decide that patents are a bad way to protect their intellectual property. Instead, they keep their ideas a secret. Trade secrets are actually quite common: The formula for Coca-Cola is a trade secret, as is Colonel Sanders's secret recipe. What is one major strength and one major weakness of a trade secret when compared to applying patent? A. One major strength is that the government will enforce the trade secret so that no competitor discovers it. One major weakness is that there is always the possibility that a competitor find out the secret. B. One major strength is that a corporation never needs to tell its secret. One major weakness is that a trade secret is a public government record. C. One major strength is that a corporation never needs to tell its secret. One major weakness is that if a competitor finds out the secret, the corporation can't go to the government and ask them to prevent the competitor from using the idea. D. One major strength is that the government will enforce the trade secret so that no competitor discovers it. One major weakness is that a trade secret is a public government record.

Correct. Businesses face an important trade-off when they decide whether to request a public, government-enforced patent or whether to just keep a private unenforceable trade secret. Points Earned: 1/1 Correct Answer: C

Three countries have different amounts of K. The country of Ilia has 100 machines, the country of Caplania has 10,000 machines, and the country of Hansonia has 1,000,000 machines. What will GDP (Y) be in these three countries given that they produce GDP in the same manner: Y = 5? ? A. Ilia will produce 50 units of output, Caplania will produce 500 units of output, and Hansonia will produce 5,000 units of output. B. Ilia will produce 5 units of output, Caplania will produce 500 units of output, and Hansonia will produce 5,000 units of output. C. Ilia will produce 50 units of output, Caplania will produce 50 units of output, and Hansonia will produce 5,000 units of output. D. Ilia will produce 50 units of output, Caplania will produce 500 units of output, and Hansonia will produce 50,000 units of output.

Correct. Even though they produce GDP in the same manner, the country with the highest amount of capital will be the most productive. Points Earned: 1/1 Correct Answer: A

Many people say that if people save "too much," the economy will be hurt. They often refer to the fact that consumer spending is two-thirds of GDP to make this point. This is sometimes called the "paradox of thrift." In the Solow model, is there a paradox of thrift? A. Yes, since a high savings rate makes a country richer in the long run. B. Yes, since a high savings rate makes a country poorer in the long run. C. No, since a high savings rate makes a country richer in the long run. D. No, since a high savings rate makes a country poorer in the long run.

Correct. High savings in the Solow model is a good thing because it will transform into investment, which will increase output. Points Earned: 1/1 Correct Answer: C

According to Thomas Jefferson, how are ideas like flames? A. ideas are non-rivalrous B. ideas are rivalrous C. ideas are semi-rivalrous D. None of these answers.

Correct. Ideas are like flames because you can spread the idea to another person without losing the idea yourself. Points Earned: 1/1 Correct Answer: A

What is the most important factor in explaining the standard of living in rich countries? A. government regulations B. taxes on capital and R&D C. capital D. ideas

Correct. Ideas have really made the difference in the standard of living of rich countries. Solow estimated that better ideas are responsible for about three-fourths of the U.S. standard of living. Points Earned: 1/1 Correct Answer: D

In the Solow model, if the depreciation rate increases, what happens to the steady state capital level and output level? A. they both increase B. they both decrease C. The steady state capital stock will increase and the output will decrease. D. The steady state capital stock will decrease and the output will increase.

Correct. If a country must devote more resources every year to replacing old machines, this will reduce the capital stock and output. Points Earned: 1/1 Correct Answer: B

Many people say that saving more is bad for the economy. They say that spending money on consumer goods keeps the money moving through the economy. According to the Solow model, is this line of thinking correct? A. Yes, since savings reduce investment in physical capital. B. Yes, since savings reduce the amount of new ideas being generated. C. No, since savings increase the standard of living of an economy. D. No, since savings is not related to the standard of living.

Correct. In the Solow model, more savings mean that more capital goods can be produced and consumers can enjoy a higher standard of living. Points Earned: 1/1 Correct Answer: C

A drug company has $1 billion to spend on research and development. It has to decide on one of two projects: Project A = spend the money on a project to fight deadly forms of influenza including bird flu OR Project B = spend the money on a project to fight a condition of red, itchy skin know as eczema. The company expects both projects to be equally profitable, all things considered: Yes, Project A is riskier (since the rare flu may never come along), but if the disease hits, there will be a worldwide market willing to pay a lot of money to cure the flu. Then one day, before deciding between A and B, the drug company's CEO reads in the newspaper that the European Union and the United States will not honor patents in the event of a major flu outbreak. Instead, these governments will "break the patent" and just make the drug available everywhere for $1 per pill. The company will only get $1 per pill instead of the $100 or $200 per pill they had expected. Given this new information, which project is the company likely to spend its research and development money on? A. Project A, because it is now subsidized by the governments. B. Project A, because firms are guaranteed to sell the drug for $1 per pill. C. Project B, because it is now the safe project. D. None of these answers.

Correct. Private companies are likely to do less research on bird flu and other diseases where the government is likely to "break the patent" in case of emergency. Points Earned: 1/1 Correct Answer: C

Let's think about two countries, Frugal and Smart. In Frugal, people devote 50 percent of GDP to making new investment goods, so = 0.5, and their production function is Y = . In Smart, people devote 25 percent of GDP to making new investment goods, so = 0.25, and their production function is Y = 2. Both countries start off with K = 100. What is the amount of consumption in each country this year? A. Frugal's consumption is 5 units of output and Smart's consumption is 15 units of output. B. Frugal's consumption is 15 units of output and Smart's consumption is 5 units of output. C. Frugal's consumption is 15 units of output and Smart's consumption is 15 units of output. D. Frugal's consumption is 5 units of output and Smart's consumption is 5 units of output.

Correct. Smart makes the same amount of physical capital as Frugal, but the level of consumption is higher in Smart. Points Earned: 1/1 Correct Answer: A

Some people believe that machines wearing out are a good thing in an economy because this creates jobs in the manufacturing industries. According to the Solow model, is this line of thinking correct? A. No, because high depreciation rates lower the capital stock and output of an economy. B. No, because high depreciation rates increase the capital stock and output of an economy. C. No, because the depreciation rate has no effect on the capital stock and output of an economy. D. Yes, because high depreciation rates increase the capital stock and output of an economy.

Correct. The Solow model contradicts the idea that broken down machines creates jobs and makes us richer. Countries should hope for low depreciation rates. Points Earned: 1/1 Correct Answer: A

Three countries have different amounts of K. The country of Ilia has 100 machines, the country of Caplania has 10,000 machines, and the country of Hansonia has 1,000,000 machines. These three countries produce GDP in the same manner: Y = 5. If 10 percent of all machines become worthless every year (depreciate), then how many machines will become worthless in these three countries this year?. If 10 percent of all machines become worthless every year (depreciate), then how many machines will become worthless in these three countries this year? A. Ilia: 10 machines; Caplania: 100 machines; Hansonia: 100,000 machines B. Ilia: 1 machine; Caplania: 100 machines; Hansonia: 100,000 machines C. Ilia: 10 machines; Caplania: 1,000 machines;Hansonia: 10,000 machines D. Ilia: 10 machines; Caplania: 1,000 machines;Hansonia: 100,000 machines

Correct. The greater the capital stock, the greater the depreciation. Points Earned: 1/1 Correct Answer: D

When will people work harder to invent new ideas? A. When they can patent those ideas for 1 year (or a relatively short period of time). B. When they can patent those ideas for 10 years (or a relatively long period of time). C. When the government imposes high taxes on R&D expenditures. D. When the government lowers subsidies on R&D expenditures.

Correct. The longer lasting monopoly is worth more since innovative firms have a longer period to dominate the market. Points Earned: 1/1 Correct Answer: B

Let's keep track of a nation's capital stock for five years. Mordor starts off with 1,000 machines, and every year, 5 percent of the machines depreciate or wear out. Fortunately, the people in this land produce 75 machines per year, every year. The key equation for keeping track of capital is quite simple: Next year's capital = Last year's capital + Investment - Depreciation. What is the annual investment equal to in Mordor for the next 5 years? A. 75 machines per year B. 1,000 machines per year C. 50 machines per year D. None of these answers.

Correct. The people in this land are continuously building physical capital equal to 75 machines. Points Earned: 1/1 Correct Answer: A

Which of the following countries are likely to have a higher rate of investment? A. A catch-up country because they will quickly notice the payoff from investment. B. A cutting-edge country because they grow primarily through investment. C. A steady-state country because investment is greater than depreciation. D. None of these answers.

Correct. These fast-growing countries will try to save a lot in hopes of getting a big reward in a few years. Points Earned: 1/1 Correct Answer: A

Y = A√K represents A. a production function, which supposes economic growth is based on capital per worker. B. a production function, which supposes economic growth is based on human capital. C. a production function, which supposes economic growth is based on capital, and ideas that increase productivity. D. a production function, which supposes economic growth is based on capital.

Economic growth is based on capital (K), and ideas that increase productivity (A). Points Earned: 1/1 Correct Answer: C

The total savings per worker in the Solow model is the product of A. the savings of the SAM divided the capital stock of the SAM B. SAM savings divided by GDP. C. the savings rate and output. D. the savings rate out of income times productivity.

From the SAM, the savings rate is total savings / income, s = S/Y. Savings per worker is then sy, where y is Y/L and L is the number of workers. Points Earned: 1/1 Correct Answer: D

How does savings affect the rate of growth of income per worker in the steady state of the Solow model with no technical change? A. growth in income per worker in the steady state depends on the all the parameters of the model, and so can vary widely. B. Income per worker does not grow at all, if there is no technical change. C. an increase in the savings rate raises the rate of growth of steady-state income per capita. D. an increase in the savings rate reduces the steady-state capital stock.

In the steady state, capital per worker does not change. Therefore income per worker does not change unless there is technological change. So with no technological change, the growth rate of income per worker is zero. Points Earned: 1/1 Correct Answer: B

In the traverse to the Solow steady state, raising the rate of savings A. has no affect on the growth rate of the capital-labor ratio or income per worker. B. increases the rate of growth of the capital-labor ratio and decreases the rate of growth of income per worker. C. decreases the rate of growth of the capital-labor ratio and the rate of growth of income per worker. D. increases the rate of growth of the capital-labor ratio and the rate of growth of income per worker.

In the traverse or transient phase of the Solow model, the Solow equation holds: ∆k = sy - (n+δ)k. The rate of growth of the capital-labor ratio is thus ∆k/k = sy/k - (n+δ) = s/y - (n+δ). This can be used to calculate the effect of an increase in any of the parameters on the right. Points Earned: 1/1 Correct Answer: D

The Solow model in intensive form describes the motion of A. δ the rate of depreciation B. L the amount of labor in the economy C. K the level of capital stock D. k the capital-labor ratio

Intensive form of the Solow model is expressed as a function of capital per unit of labor. Points Earned: 1/1 Correct Answer: D

The labor force participation rate is fraction of the population employed or unemployed in the economy. If income per worker is 100 and the labor force participation rate is 50 percent, what is income per capita. A. 100. B. 50. C. 25. D. just above 50.

Labor force participation rate is number of people in the labor force divided by the population. The labor force is the sum of employed plus unemployed workers. Points Earned: 1/1 Correct Answer: B

If the stock of physical capital (that is machinery, equipment, etc.) and human capital remain the same, but the population increases, then A. labor productivity will decrease. B. labor productivity will increase. C. labor productivity will not change. D. the new labor will increase productivity.

Labor productivity will decline, as the capital is not properly aligned to support labor. Points Earned: 1/1 Correct Answer: A

Savings is responsible for capital widening and capital deepening. Capital _______ is the change in the capital-labor ratio; capital ________ is the amount of capital required to provide for new workers and replace worn out machines. A. deepening; widening per capita. B. deepening; widening. C. widening; deepening. D. deepening per capita and widening per machine.

Savings in the Solow equation is the product of the savings rate and output per worker. Savings provides resources for capital deepening, the increase in the capital-labor ratio, and capital widening, provision for depreciation and for new workers. Points Earned: 1/1 Correct Answer: B

Spillovers mean that A. there is too little investment in R&D. B. there is too much investment in R&D. C. there is excessive investment in R&D. D. there is no investment in R&D.

Spillovers mean that there is too little investment in R&D, as proven in Figure 7.13. Points Earned: 1/1 Correct Answer: A

In the Solow model with no technical change and a square root production function, the savings rate is 0.25 the rate of growth of the labor force is 0.025, the depreciation rate is 0.03, the steady-state capital-labor ratio is then A. 29.752 B. 0.207 C. 20.661 D. 0.592

Steady-state capital-labor ratio is [s/(n+δ)]^2. Points Earned: 1/1 Correct Answer: C

If the most intelligent portion of the labor force leaves the country to seek opportunity elsewhere, there will be a decrease in human capital which will lead to A. an increase in economic growth. B. a decrease in economic growth. C. no change in economic growth. D. an increase in productivity.

The Solow Model argues that output is based on the quantity and quality of physical capital, human capital, and productivity of capital and labor. If less human capital is available, growth will slow down. Points Earned: 1/1 Correct Answer: B

The adoption of computers in the workplace has lead to a(n) A. increase in the supply of labor because people are needed to operate the computers. B. increase in labor productivity because computers are a capital good. C. decrease in labor productivity because computers are a capital good. D. decrease in human capital because computers are physical capital.

The adoption of computers in the workplace has lead to an increase in labor productivity because computers are a capital good. Points Earned: 1/1 Correct Answer: B

_______________________ the increase in output caused by the addition of one more unit of capital A. The marginal product of labor is B. The marginal product of capital is C. The average product of labor is D. The total product of capital is

The marginal product of capital is the increase in output caused by the addition of one more unit of capital. Points Earned: 1/1 Correct Answer: B Your Response: B

In the Solow model with no technical change, the rate of growth of the capital-labor ratio in the steady state is _________. If the rate of technical change is 3%, the rate of increase in productivity or income per worker is _________ A. 0.03,0 B. 0,0.05 C. 0,sqrt(0.03) D. 0,0.03

The steady-state in the Solow model is the value of the capital-labor ratio such that the change in the capital-labor ratio is zero. When augmented by technological change, income per worker grows at the rate of technological change. Points Earned: 1/1 Correct Answer: D

When investment is greater than depreciation, A. the capital stock grows. B. the capital stock shrinks. C. the capital stock does not change. D. the capital stock declines.

When investment is greater than depreciation, the capital stock grows. Points Earned: 1/1 Correct Answer: A

The factors that influence economic growth are A. technological change, improvements in the quality of labor, and increases in the amount of capital. B. higher prices, lower unemployment, and higher production. C. decreases in unemployment, increases in immigration, and rising prices. D. lower prices, higher unemployment, and investments in technology.

Y = F(A, K, eL) is the Solow Model, which argues that output is based on the quantity and quality of physical capital, human capital, and productivity of capital and labor. Points Earned: 1/1 Correct Answer: A

When economists note the variable "K", they are referring to A. the tools, instruments, and other produced goods used to produce additional goods and services. B. the workers that firms employ to produce goods and services. C. purchases for stocks and bonds. D. the funds that firms use to buy and operate their businesses.

Y = F(A, K, eL) is the Solow Model, which argues that output is based on the quantity and quality of physical capital, human capital, and productivity of capital and labor. Points Earned: 1/1 Correct Answer: A