Midterm Topic 3

Question 1

Total Factor Productivity

Answer 1

A, or the variable that expresses any improvements in technologies or economic conditions in the economy that allows capital and labor to be utilized more effectively. (how well labor and capital are utilized to produce greater amounts of output).

Question 2

Potential factors of TFP

Answer 2

1. Geography (climate, land/soil quality, health, coastal access)
2. Institutions (civil liberties and social capital, openness to trade, education)
3. Other (state of technologies, infrastructure (transportation), terms of trade/commodity prices.

Question 3

the exponent in Cobb-Douglas

Answer 3

relative importance of capital to labor.

Question 4

marginal product of an input

Answer 4

how output changes when one additional unit of input is used

Question 5

Property 1

Answer 5

constant returns to scale. Doubling all inputs results in doubling output. property is also referred to as “replication property”

Question 6

Property 2

Answer 6

Output is increasing in inputs and total factor productivity. [MPK> 0, MPN >0, MPA>0]

Question 7

Property 3

Answer 7

diminishing returns to an output.

adding one input increases output (prop 2) but at a diminishing rate (prop 3)– illustrates effects of “crowding”

mathematically, first derivative of the marginal product of labor / capital (also second derivative of production function) is negative. MPkk<0 MPNN<0

Question 8

Property 4

Answer 8

total factor productivity increases input productivities–increase in total factor productivity increases both the marginal product of capital (MPK) and the marginal product of labor (MPN).

MP KA>0 MP NA>0

Question 9

Property 5

Answer 9

inputs increase other input productivities.

MP NK >0 MP KN>0

Question 10

exogenous variables in production function

Answer 10

A, N, K

Question 11

endogenous variables in production functoin

Answer 11

Y

Question 12

movements in the production curve

Answer 12

caused by changes in exogenous variables that are illustrated on one of the axes.

Question 13

shifts in production curve

Answer 13

caused by changes in exogenous variables that are not illustrated on one of the two axes.

Question 14

real wage, w

Answer 14

expresses worker’s compensation per unit of labor in terms of real goods and services

w = W/P
(W is nominal wage, or monetary compensation per unit of labor and P is price level of goods and services)

Question 15

equilibrium, profit maximizing conditions

Answer 15

MP N = w and MP K = r.

Question 16

household labor supply

Answer 16

tradeoff between leisure (f) and consumption for which the household requires labor income.

Question 17

constraints of household labor supply

Answer 17

1. consumption constraint: expenditures of consumption are equal to labor income
2. time constraint of 24 hours

budget constraint: x=24w - wf

Question 18

income effect

Answer 18

change in opportunities. illustrated by the change in the area under the budget line.

Question 19

substitution effect

Answer 19

change in opportunity cost. illustrated by the change in the slope of the budget line.

Question 20

Country B enjoys greater GDP per capita than country C if…

Answer 20

1. A B > A C

2. k B > k C

Question 21

GDP per capita

Answer 21

Y / N
fundamental measure to assess the standard of living across different countries in monetary terms–with respect to the production of goods and services and income. not a universal perfect measure.

(Other measures of standard of living: health and life expectancy, opportunities in life/access to institutions, distribution of income)

Question 22

labor demand

Answer 22

follows firms’ profit maximization problem in perfectly competitive markets taking output and input prices as given

Question 23

labor supply

Answer 23

derived from households’ utility maximization problem.

Question 24

causes of GDP growth

Answer 24

input growth or factor productivity growth

Question 25

causes of GDP per capita growth

Answer 25

differences in total factor productivity and capital per capita