Intermediate Macroeconomics CH4

Output per person is higher when a. a country is more efficient in adopting a technology. b. a country has a higher capital-to-population ratio. c. a country has stronger property rights and contract enforcement. d. All of these choices are correct.

d. All of these choices are correct. Pages 81-83; 91-93. 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.

If the productivity parameter is assumed to equal 1, the production model a. correctly identifies that countries are richer if they have more capital. b. incorrectly predicts that poor countries are substantially richer than they are. c. incorrectly predicts that some countries are richer than the United States. d. All of these choices are correct.

d. All of these choices are correct. Pages 83-84 The model implies that more capital implies more output per person but incorrectly overestimates the value of per capita output.

A firm's profit is simply defined as: a. zero. b. revenues plus costs. c. revenues minus costs. d. the price of output minus labor costs. e. the price of output minus labor costs minus capital costs.

c. revenues minus costs.

True and false: We cannot tell whether the production function Y = K^aL^1-a has constant returns to scale, because we do not know the value of a.

False Page 73. The Cobb-Douglas production function has constant returns to scale because the exponents a + (1-a) sum to 1.

True or false: The standard replication argument implies that Italy can raise its per capita GDP by doubling the amount of capital per person.

False Page 83. Capital per person is subject to diminishing returns to capital. Thus, because the exponent on capital per person is less than 1, doubling only the amount of capital per person will not double per capita output.

True or false: If the marginal product of capital is less than the rental rate of capital, the firm should rent more capital.

False Page 76. A firm should only rent more capital if the MPK is greater than the rental rate of capital.

True or false: 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 Pages 78-79. Regardless of the amount of capital or labor in an economy, the exponents in the production function determine the factor shares.

True or false: 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 Pages 87-88. A higher productivity parameter implies that U.S. production (output per person) is higher for any given level of capital per person.

A firm uses capital and labor to produce a good. Which of the following is greatest? a. Accounting profit. b. Economic profit. c. It depends on the situation. d. All the choices are equal.

a. Accounting profit. Pages 79-80. Economic profit equals total revenue minus payments to all inputs. Accounting profit equals total revenue minus payments to inputs other than capital.

A production function has inputs X, Y, and Z and a productivity parameter A(bar). The production function (see image) exhibits a. constant returns to scale. b. decreasing returns to scale. c. diminishing returns to scale. d. increasing returns to scale.

a. constant returns to scale Page 73. Doubling each input X, Y, and Z, will result in a doubling of output. If the exponents on the inputs sum to 1, it has constant returns to scale.

According to Figure 4.5, does the production model accurately predict the level of per capita GDP for Singapore? a. Yes, because the predicted value of per capita GDP for Singapore is close to the U.S. level (which is equal to 1) b. Yes, because the predicted value of per capita GDP for Singapore is close to the actual value of its per capita GDP c. No, because the predicted value of per capita GDP for Singapore is different than the U.S. level (which is equal to 1) d. No, because the predicted value of per capita GDP for Singapore is different than the actual value of its per capita GDP

b. Yes, because the predicted value of per capita GDP for Singapore is close to the actual value of its per capita GDP Pages 84-85; Figure 4.5. If we extend the solid line on Figure 4.5, Singapore would lie very close to it, suggesting that the predicted and the actual values of per capita GDP for this country are almost equal to each other. This means the model successfully predicts Singapore's per capita GDP.

Consider two economies. If each country has the same production function with inputs of capital and labor. if the amounts of capital and labor are the same, the country that ________ produces more. a. is less productive b. is more productive c. has more natural resources d. has more workers

b. is more productive

If MPL < w, the firm: a. has the optimal amount of labor. b. should fire some labor until MPL = w. c. should fire some labor until MPL = 0. d. should hire more capital until MPK = 0. e. should hire more capital until MPL = w.

b. should fire some labor until MPL = w.

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 a. .07. b. .12. c. .23. d. .30.

c. .23 Page 87. 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.

In a production model where the production function is Y=AK^1/3L^2/3 the equilibrium wage rate is equal to 30/27, labor supply is 27 workers and the productivity parameter is equal to 1. What is the equilibrium level of capital? a. 5 b. 25 c. 125 d. 625

c. 125

Consider a perfectly competitive economy with a production function. There are 27 workers who produce cream cheese (a numéraire good) with 125 units of capital. If the productivity parameter is equal to 1, what is the sum of the total payments to capital and labor in equilibrium? a. Cannot be determined because we don't know the wage rate and the rental rate of capital b. 152 tons of cream cheese c. 45 tons of cream cheese d. $45

c. 45 tons of cream cheese Page 74; 79. Since the numéraire good is cream cheese, all prices are expressed in tons of cream cheese. Total payments to capital and labor (w*L + r*K) are also expressed in tons of cream cheese. In equilibrium the sum of payments to capital and labor is equal to total production.

Consider an economy characterized by the production function where the productivity parameter is equal to 1.2. How many units of output can be produced with 25 units of capital and 64 workers? a. 10 b. 24 c. 48 d. 1,600

c. 48 Pages 72-73. A production function is a mathematical representation of the relationship between inputs and output, i.e. how much output can be produced with any input combination. Replacing , K = 25, and L = 64 yields Y = 48.

Which of the following is included in TFP? a. The amount of labor b. The amount of capital c. The quality of labor d. All of these choices are correct.

c. The quality of labor Pages 86-87; 91. Because TFP represents the residual, it includes anything not explicitly in the mathematical model. The amount of labor and capital are included, but differences in human capital (labor quality) are not explicitly included in the model—and thus are in TFP.

One of the key characteristics of the Cobb-Douglas production function is: a. increasing returns to scale. b. decreasing returns to scale. c. constant returns to scale. d. that it compacts all inputs into a single equation. e. that it is an exact replication of a firm's production function.

c. constant returns to scale.

Which of the following production functions exhibits constant returns to scale? a. Y=K^1−bL^b b. Y=K^0.2L^0.8 c. Y=K^2/3L^1/3 d. Y=K^bL^1−b e. All of these answers are correct.

e. All of these answers are correct.