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answerstopracticequestions2spring2005

The document contains practice questions and answers for an Economics 302 course, focusing on production functions, marginal products, and consumption functions. It includes multiple choice questions, problem-solving exercises, and tables for calculations related to labor, capital, output, and consumption. The content emphasizes the relationships between wages, labor, and output in economic models.

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tarusheekumarr
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2 views

answerstopracticequestions2spring2005

The document contains practice questions and answers for an Economics 302 course, focusing on production functions, marginal products, and consumption functions. It includes multiple choice questions, problem-solving exercises, and tables for calculations related to labor, capital, output, and consumption. The content emphasizes the relationships between wages, labor, and output in economic models.

Uploaded by

tarusheekumarr
Copyright
© © All Rights Reserved
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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Economics 302

Spring 2005
Answers to Practice Questions for Chapter 3

Multiple Choice Questions for a Quick Review:

1. a.
2. a.
3. b
4. d
5. c.
6. d.
7. a., b., and c. are not investment
8. a.
9. a.
10. a.
11. d.
12. c.
13. e.

Problems:
1.
a. Fill in the table below:
# of Units of Marginal Product of Marginal Nominal Real Wage
Workers Output Labor (approximation Product of Wage
using the change in Labor
output divided by the (calculate
change in labor using calculus)
1 4 x x $10 $1
-1/2
2 5.7 1.7/1 = 1.7 2*2 = 1.42 $10 $1
3 6.9 1.2/1 = 1.2 2*3-1/2 = 1.16 $10 $1
4 8 1.1/1 = 1.1 1 $10 $1
5 8.9 .9/1 = .9 2*5-1/2 = .89 $10 $1
9 12 3.1/4 = .78 .67 $10 $1
16 16 4/7 = .57 .5 $10 $1
25 20 4/9 = .44 .4 $10 $1
36 24 4/11 = .36 .33 $10 $1
b. Graph this firm’s production function. Make sure you label the axes in your
graph. When you graph this firm’s production function you will have labor on
the x-axis and output on the y-axis. This firm experiences diminishing
marginal product of labor so the curve will flatten out as you look at higher
values of labor: the curve will have a positive slope.
c. Draw a second graph beneath your first graph and label the horizontal axis
with the same units as the horizontal axis from the first graph. On this second
graph plot out the firm’s marginal product of labor. Label the vertical axis
appropriately. When you graph this firm’s marginal product of labor curve it
will be downward sloping since the marginal product decreases as additional
units of labor are hired given the fixed level of capital.
d. Yes. You can see this from the values in the above table.
e. 4 units of labor since that is where the real wage rate is equal to the marginal
product of labor.
f. At 16 units of labor the marginal product of labor is less than the real wage
thus the firm would be paying more for each unit of labor than the value of the
production those units of labor represent.
g. At 2 units of labor the marginal product of labor is greater than the real wage
rate thus the firm is earning more in revenue from the extra production than
the costs it is incurring from hiring the additional labor. It should continue to
hire more labor until the marginal product of the last unit of labor hired is
equal to the real wage rate.
h. If the product price increases this will reduce the value of the real wage in the
last column: the firm will find that it should hire additional labor until the
marginal product of the last unit of labor hired equals the new real wage rate.
i. If the nominal wage decreases, this will increase the value of the real wage in
the last column: the firm will find that it should hire additional labor until the
marginal product of the last unit of labor hired equals the new real wage rate.
j. An increase in A will cause the level of output for any level of employment of
labor to increase. This will cause the value of the marginal product of labor to
increase as well: the firm will still hire that amount of labor where the
marginal product of labor equals the real wage rate. The marginal product of
labor will shift to the right relative to its initial location.

2.
a. Complete the following table:

Capital (K) Labor (L) Output (Y)


100 25 176.65
200 50 353.50
300 75 530.19
400 100 706.77
b. Yes.
c. Can you provide a mathematical proof of this based on the lecture material?
Go back to your notes and follow the same steps as we did in class, but
substitute this particular production function for the numerical version done in
class.
d. The real wage must equal the marginal product of labor when labor is equal to
50 units. If you compute the level of production when labor is 49 units and
capital is 200 units you can find the marginal product of the 50th unit of labor:
using a calculator it is equal to approximately $5.32.
e. The real rental value of capital must equal the marginal product of capital
when capital is equal to 200 units. If you compute the level of output when
labor is 50 units and capital is 199 then you can find the marginal product of
the 100th units of capital: using a calculator it is equal to approximately $.44.
f. Labor’s share of output is $265.08.
g. Capital’s share of output is $88.36.
h. Yes.

3. Suppose you are given a consumption function


C = 100 + .8(Y – T)
a. Complete the following table.
Y T Y-T C
$0 $20 -$20 $84
$100 $20 $80 $164
$200 $20 $180 $244
$500 $20 $480 $484
$1000 $20 $980 $884
$2000 $20 $1980 $1684
$5000 $20 $4980 $4984

b. Yes. The equation given is written in slope intercept form with the slope equal
to .8 and the y-intercept equal to 100.
c. The marginal propensity to save is .2 since we know that the MPC + MPS = 1
and the MPC has a value of .8. Also we could prove this by starting with the
equation Y = C + S + T and then solve this equation for S and substitute in the
consumption function for C. When we do this we find that the slope of the
private saving function is equal to (1 – MPC).
d. It tells us the change in consumption for a one dollar increase in disposable
income: thus if the MPC is equal to .8 we know that if disposable income
increases by $1.00, then consumption increases by $.80.

4.
a. Consumption in this economy is equal to $812.50 (use the C = 100
+ .75(Y – T) equation).
b. Sprivate is equal to $137.5 (Use the equation Y = C + Sprivate + T).
c. Spublic is equal to -$50 (Use the equation Spublic = T – G).
d. Sprivate + Spublic = National S = S = $87.50
e. I = I(r) = 400 – 20r
f. I = S = $87.50
g. r = 15.625% (Use the equation I = 400 – 20 r where I is equal to $87.50)

5.
a. Since Y and C are constant, an increase in government spending implies that
saving must decrease by an equal amount. Thus, S will decrease by $50 (T – G
now equals -$100). This, in turn, implies that investment will fall by $50 to
$237.50 and the interest rate, r, will not be equal to 8.125%.
b. These changes result in a leftward shift in the saving function and a movement
along the investment function to a higher interest rate and a lower level of
investment.
c. Y is still constant but the change in taxes, T, causes consumption to increase (C
= 100 + .8(Y – T) or C = $820). Private saving is now $80 ( Y = C + private
saving + T) and public saving is now $0 (T – G = public saving). Investment
equals national saving or $80 and the equilibrium interest rate is now equal to
16%.
d. These changes result in a leftward shift in the saving function and a movement
along the investment function to a higher interest rate and a lower level of
investment.
e. No, fiscal policy does not affect the level of aggregate output in the Classical
Model since it is determined by the level of factors of production (K and L) and
the level of technology which are assumed given and constant in the Classical
Model.
f. The investment function is now I = 450 – 20r but the levels of saving,
production, consumption, government spending and taxes do not change in this
economy. The interest rate does change however in order to equate the new
investment function with the level of saving: the new equilibrium interest rate in
this economy is 8.125%.
g. These changes result in a rightward shift in the investment function and a
movement along the saving function to a higher interest rate. Note that the level
of saving and investment do not change since the level of saving is not impacted
by the exogenous change in investment.

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