chp 3

Question 1

What are the factors of production and what is the production function?

Answer 1

The production function: Y= F(K,L) This function shows how much output (Y) the economy can produce from K (units of capital) and L (units of labor)

Question 2

What is constant returns to scale?

Answer 2

A production function has constant returns to scale if an increase of an equal percentage in all factors of production causes an increase in output of the same percentage. So if production function has constant returns to scale, then we get 10% more output when we increase both K and L by 10% So mathematically it looks like: zY = F (zK, zL). Equation shows that if we multiply both the amount of capital and labour by some number “z”, output is also multiplied by z

Question 3

What are the assumptions of this chapter?

Answer 3

Technology is fixed. The economy’s supplies of capital and labor are fixed which makes output fixed.

Question 4

Notation for this chapter for supply?

Answer 4

W = nominal wage (price of labor) • R = nominal rental rate (Price of capital) • P = price of output • W /P = real wage (measured in units of output) • R /P = real rental rate

Question 5

Equation for profit?

Answer 5

Profit= PY (Revenue) - WL (labour costs) - RK (capital costs).

Question 6

What is the marginal product of labour?

Answer 6

The extra amount of output the firm gets from one extra unit of labour holding the amount of capital fixed. MPL= F(K,L+1) - F(K,L)

Question 7

What is real wage?

Answer 7

The payment to labour measured in units of output rather then dollars, to maximize profit firms hire up to the point where MPL= real wage or W/P

Question 8

What are factor prices?

Answer 8

The amount paid to the factors of production, wage for worker, and rent owner of capital.

Question 9

What is the cobb-douglas production function?

Answer 9

The Cobb-Douglas production function has constant factor shares: a = capital’s share of total income: capital income = MPK × K = a Y labor income = MPL × L = (1 – a )Y The Cobb-Douglas production function is: Y= AK(a)L(1-a) where A represents the level of technology.

Question 10

What is the marginal product of capital?

Answer 10

The extra amount of output the firm gets from one extra unit of capital holding the amount of labour fixed. MPK= F(K+1,L) - F(K,L)

Question 11

What is the real rental price of capital?

Answer 11

The rental price measured in units of output rather then dollars, to maximize profit firms hire up to the point where MPK= real rental price or R/P

Question 12

What is the cobb-douglas production function related with average product?

Answer 12

MPK= aY/K or average production of capital MPL= (1-a)Y/L or average production of labour

Question 13

Notation for this chapter for demand?

Answer 13

Components of aggregate demand: C = consumer demand for g & s I = demand for investment goods G = government demand for g & s (closed economy: no NX ) (g&s=goods and services)

Question 14

What is disposable income?

Answer 14

Y-T or Income minus taxes

Question 15

What is the consumption function?

Answer 15

C= C (Y-T) or consumption times (income minus taxes)

Question 16

What is the marginal propensity to consume?

Answer 16

The change in C when disposable income increases by one dollar.

Question 17

What is the investment function?

Answer 17

I= I(r) where r is the real interest rate. Demand for investments goes down as real interest rate goes up. real interest rate is the cost of borrowing, the opportunity cost of using one’s own funds to finance investment spending.

Question 18

What is the aggregate demand function?

Answer 18

C(Y-T)+I(r)+G

G= government spending

Question 19

What is private saying?

Answer 19

(Y – T ) – C

Question 20

What is public saving?

Answer 20

T-G

Question 21

What is national saving?

Answer 21

Y-C-G

Question 22

What is the equation for change in consumption?

Answer 22

DC = MPC x (DY - DT )

= MPC DY - MPC DT

D is delta or triangle