Chapter 3 - National Income (1st Half)

Question 1

Cobb-Douglas Production Function

Answer 1

Y = AK^(a)L^(1-a)

A - Level of Technology
K - Capital
L - Production
a - Capital’s share of total income

Question 2

Diminishing Marginal Returns

Answer 2

As one input is increased (holding other inputs constant), its marginal product falls

Question 3

GDP is dependent on 2 things:

Answer 3

> Factors of production
Ability to turn inputs into outputs

Question 4

Marginal Productivity of Labour (MPL)

Answer 4

The extra output the firm can produce using an additional unit of labour (holding other inputs fixed)

Question 5

How can you find MPL from the production function (Y = F(K, L))?

Answer 5

Take the derivative of the production function with respect to labour (L) -> dY/dL

Question 6

Firms will continue hiring more workers until what condition is satisfied?

Answer 6

MPL = W/P (MPL = Real Wage)

Question 7

If MPL < W/P, will firms hire more or less workers?

Answer 7

Less workers. The cost of the last worker hired was more costly than the worker’s productivity.

Question 8

As real wages decrease, what happens to firms’ demand for labour?

Answer 8

Firms’ demand for labour increases (they pay each worker less for the same productivity holding all else constant)

Question 9

Capital

Answer 9

Tools, machines, and structures used in production. 1 of 2 factors of production in the Classical model of the labour market.

Question 10

Labour

Answer 10

The physical and mental efforts of workers. 1 of 2 factors of production.

Question 11

Neoclassical Theory of Distribution

Answer 11

Each factor of input is paid by its marginal product.

Question 12

Give 2 reasons for rising income inequality

Answer 12

1) Technological Progress: more unskilled jobs are becoming automated (less costly for businesses)

2) Self-Employment: rise in self-employment and a fall in hours worked for unskilled workers (rising gap in wages between skilled and unskilled workers)

Question 13

What are the assumptions for the classical model of the labour market

Answer 13

-Technology is fixed
-Capital and Labour are fixed
-Closed Economy (no NX)
-Market Clearing Model

Question 14

Rental Rate (K/P)

Answer 14

Price per unit firms pay for capital (measured in units of goods).

Question 15

Real Wage (W/P)

Answer 15

Price per unit firms pay for labour (measured in units of output).

Question 16

Returns to Scale

Answer 16

When capital and labour increase by z%, the output will increase by some z%.