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
