Macroeconomics (Hubbard et al.)
Chapter 4 Determining Aggregate Production
4.1 The Aggregate Production Function
1) The relationship between the inputs employed by a firm and the maximum output it can produce with those inputs is called the firm's
A) total factor productivity.
B) marginal production level.
C) technological ratio.
D) production function.
Answer: D
Diff: 1 Page Ref: 106
Topic: The Aggregate Production Function
Objective: LO1: Describe the aggregate production function.
Special Feature: none
AACSB: Reflective Thinking Skills
*: Recurring
2) The processes a firm uses to turn inputs into outputs of goods and services are the firm's
A) production function.
B) technology.
C) total factor productivity.
D) manufacturing ideology.
Answer: B
Diff: 1 Page Ref: 106
Topic: The Aggregate Production Function
Objective: LO1: Describe the aggregate production function.
Special Feature: none
AACSB: Reflective Thinking Skills
*: Recurring
3) The aggregate production function is an equation that shows the relationship between ________ and ________.
A) the inputs employed by firms; the maximum output firms can produce with those inputs
B) the inputs employed by an individual firm in an economy; the average of the inputs employed by all firms in an economy
C) the output produced by an individual firm in an economy; the average of the output produced by all firms in an economy
D) the average level of capital used in production in an economy; the average level of labor used in production in an economy
Answer: A
Diff: 1 Page Ref: 107
Topic: The Aggregate Production Function
Objective: LO1: Describe the aggregate production function.
Special Feature: none
AACSB: Reflective Thinking Skills
*: Recurring
4) In the aggregate production function, Y represents real GDP, Krepresents the capital stock, L represents the quantity of labor, and Arepresents an index of efficiency. Which of the following equations represents the aggregate production function?
A) Y = (Kx L) / A
B) Y x A= (K x L)
C) Y = AF(K, L)
D) Y = (Kx L) = A /FY
Answer: C
Diff: 1 Page Ref: 107
Topic: The Aggregate Production Function
Objective: LO1: Describe the aggregate production function.
Special Feature: none
AACSB: Reflective Thinking Skills
*: Recurring
5) In the aggregate production function, the symbol "A " represents an index of how efficiently the economy transforms capital and labor into real GDP. "A" measures the influence
A) of any factor that determines real GDP.
B) of the quantities of capital and labor that determine real GDP.
C) of any factor that determines real GDP other than the quantities of capital and labor.
D) of the quantities of capital and labor that determine real GDP, holding other factors constant.
Answer: C
Diff: 2 Page Ref: 107
Topic: The Aggregate Production Function
Objective: LO1: Describe the aggregate production function.
Special Feature: none
AACSB: Reflective Thinking Skills
*: Recurring
6) Which of the following equations best represents the concept of constant returns to scale?
A) 3Y = AF(3K, 3L)
B) 2Y = 2AF(2K, 2L)
C) 1/4Y = (AF / 4 )(4K, 4L)
D) 5Y = [AF(K, L)] / 5
Answer: A
Diff: 2 Page Ref: 108
Topic: The Cobb-Douglas Production Function
Objective: LO1: Describe the aggregate production function.
Special Feature: none
AACSB: Reflective Thinking Skills
*: Recurring
7) Which of the following equations best represents a Cobb-Douglas production function?
A) Y = AK1L1
B) Y = AK3/4L1/4
C) Y = AK1/3L3
D) Y = AK2/3L3/2
Answer: B
Diff: 2 Page Ref: 108
Topic: The Cobb-Douglas Production Function
Objective: LO1: Describe the aggregate production function.
Special Feature: none
AACSB: Reflective Thinking Skills
*: Recurring
8) In the Cobb-Douglas production function Y = AK3/4L1/4,
A) capital is a more expensive input than labor.
B) capital is more plentiful than labor.
C) diminishing returns to capital are three times greater than are diminishing returns to labor.
D) capital has a larger share in national income than does labor.
Answer: D
Diff: 2 Page Ref: 108
Topic: The Cobb-Douglas Production Function
Objective: LO1: Describe the aggregate production function.
Special Feature: none
AACSB: Reflective Thinking Skills
*: Recurring
9) In the Cobb-Douglas production function, the index of the overall level of efficiency of transforming capital and labor into real GDP is called
A) total factor productivity.
B) allocative efficiency.
C) the marginal efficiency index.
D) the transformation allocation of inputs.
Answer: A
Diff: 1 Page Ref: 108
Topic: The Cobb-Douglas Production Function
Objective: LO1: Describe the aggregate production function.
Special Feature: none
AACSB: Reflective Thinking Skills
*: Recurring
10) From 1949 to 2009, capital's and labor's share of income in the United States have, on average, been about ________, respectively.
A) 1/2 and 1/2
B) 4/5 and 1/5
C) 1/3 and 2/3
D) 3/4 and 1/4
Answer: C
Diff: 1 Page Ref: 108
Topic: The Cobb-Douglas Production Function
Objective: LO1: Describe the aggregate production function.
Special Feature: none
*: Recurring
Article Summary
In response to a local newspaper report stating that foreign investment in the mining industry will be restricted, the Brazilian government announced that it has no immediate plans to limit this investment, and increase royalties in the industry. The Brazilian mining industry is dominated by domestic iron ore producer Vale, although international investment has grown in the past year, due in part to significant increases in metal prices. Requests for mineral prospecting licenses in Brazil increased by more than 30 percent in 2010, and estimates show the mining sector attracting approximately $62 billion in investment between 2010 and 2014.
Source: Raymond Colitt, “Exclusive: Brazil not curbing foreign mining investment ,” Reuters, February 4, 2011.
11) Refer to the Article Summary. The 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
A) increase due to diminishing marginal returns.
B) decrease due to diminishing marginal returns.
C) increase since capital is not subject to diminishing marginal returns.
D) decrease since capital is not subject to diminishing marginal returns.
Answer: B
Diff: 2 Page Ref: 108-109
Topic: The Cobb-Douglas Production Function
Objective: LO1: Describe the aggregate production function.
Special Feature: Making the Connection: "Exclusive: Brazil not curbing foreign mining investment"
AACSB: Reflective Thinking Skills
12) Refer to the Article Summary. The increase in foreign investment in Brazil's mining industry will increase the capital stock in Brazil. Holding labor and total factor productivity constant, continued increases in the capital stock will lead to
A) larger and larger increases in real GDP.
B) smaller and smaller increases in real GDP.
C) larger and larger decreases in real GDP.
D) small increases, followed by small decreases, in real GDP.
Answer: B
Diff: 2 Page Ref: 109-110
Topic: The Marginal Products of Capital and Labor
Objective: LO1: Describe the aggregate production function.
Special Feature: Making the Connection: "Exclusive: Brazil not curbing foreign mining investment"
AACSB: Reflective Thinking Skills
13) All else equal, in an economy with an upward-sloping production function, as an economy accumulates more capital goods,
A) the labor supply must increase.
B) real GDP increases.
C) the labor supply must decrease.
D) the marginal product of capital will increase.
Answer: B
Diff: 1 Page Ref: 109
Topic: The Marginal Products of Capital and Labor
Objective: LO1: Describe the aggregate production function.
Special Feature: none
AACSB: Reflective Thinking Skills
*: Recurring
14) All else equal, continued increases in the labor supply in an economy will lead to
A) continued increases in the capital stock.
B) higher levels of total factor productivity.
C) smaller increases in real GDP.
D) an increase in labor's share of income.
Answer: C
Diff: 2 Page Ref: 110
Topic: The Marginal Products of Capital and Labor
Objective: LO1: Describe the aggregate production function.
Special Feature: none
AACSB: Reflective Thinking Skills
*: Recurring
15) Suppose that the production function for the economy is: Y = AK1/4L3/4. Assume that real GDP is $8,000 billion, capital stock is $32,000 billion, and the labor supply is 120 billion hours. The value of the marginal product of capital is ________ per dollar of capital.
A) $0.0625
B) $0.133
C) $0.16
D) $1.00
Answer: A
Diff: 2 Page Ref: 111-112
Topic: The Marginal Products of Capital and Labor
Objective: LO1: Describe the aggregate production function.
Special Feature: Solved Problem 4.1: Calculating the Marginal Product of Labor and the Marginal Product of Capital
AACSB: Analytic Skills
16) Suppose that the production function for the economy is: Y = AK1/4L3/4. Assume that real GDP is $8,000 billion, capital stock is $32,000 billion, and the labor supply is 120 billion hours. An increase in the capital stock of $1 billion will increase real GDP by
A) $0.03125 billion.
B) $0.0625 billion.
C) $0.25 billion.
D) $1 billion.
Answer: B
Diff: 2 Page Ref: 111-112
Topic: The Marginal Products of Capital and Labor
Objective: LO1: Describe the aggregate production function.
Special Feature: Solved Problem 4.1: Calculating the Marginal Product of Labor and the Marginal Product of Capital
AACSB: Analytic Skills
17) Suppose that the production function for the economy is: Y = AK1/4L3/4. Assume that real GDP is $8,000 billion, capital stock is $32,000 billion, and the labor supply is 120 billion hours. The value of the marginal product of labor is ________ per hour of labor.
A) $30
B) $50
C) $66.67
D) $90
Answer: B
Diff: 2 Page Ref: 111-112
Topic: The Marginal Products of Capital and Labor
Objective: LO1: Describe the aggregate production function.
Special Feature: Solved Problem 4.1: Calculating the Marginal Product of Labor and the Marginal Product of Capital
AACSB: Analytic Skills
18) Suppose that the production function for the economy is: Y = AK1/4L3/4. Assume that real GDP is $8,000 billion, capital stock is $32,000 billion, and the labor supply is 120 billion hours. An increase of one hour of labor will increase real GDP by
A) $0.008.
B) $50.
C) $720.
D) $6,000.
Answer: B
Diff: 2 Page Ref: 111-112
Topic: The Marginal Products of Capital and Labor
Objective: LO1: Describe the aggregate production function.
Special Feature: Solved Problem 4.1: Calculating the Marginal Product of Labor and the Marginal Product of Capital
AACSB: Analytic Skills
19) All else equal, as the capital stock in an economy increases, the marginal product of capital will
A) increase at an increasing rate.
B) increase at a decreasing rate
C) decrease at an increasing rate.
D) decrease at a decreasing rate.
Answer: B
Diff: 3 Page Ref: 112
Topic: The Marginal Products of Capital and Labor
Objective: LO1: Describe the aggregate production function.
Special Feature: none
AACSB: Reflective Thinking Skills
*: Recurring
20) All else equal, if the labor stock in an economy increases, the marginal product of labor will
A) increase at an increasing rate.
B) increase at a decreasing rate
C) decrease at an increasing rate.
D) decrease at a decreasing rate.
Answer: C
Diff: 2 Page Ref: 112
Topic: The Marginal Products of Capital and Labor
Objective: LO1: Describe the aggregate production function.
Special Feature: none
AACSB: Reflective Thinking Skills
*: Recurring
21) Suppose that the production function for the economy is: Y = AK1/4L3/4. Assume that real GDP is $8,000 billion, capital stock is $32,000 billion, and the labor supply is 120 billion hours. All else equal, if the capital stock increased by $2,000, the value of the marginal product of capital will be ________ per dollar of capital.
A) $0.0147
B) $0.0597
C) $0.0625
D) $0.25
Answer: B
Diff: 3 Page Ref: 112
Topic: The Marginal Products of Capital and Labor
Objective: LO1: Describe the aggregate production function.
Special Feature: none
AACSB: Analytic Skills
*: Recurring
22) Suppose that the production function for the economy is: Y = AK1/4L3/4. Assume that real GDP is $8,000 billion, capital stock is $32,000 billion, and the labor supply is 120 billion hours. All else equal, if the amount of labor employed increased by 20 billion hours, the value of the marginal product of labor will be ________ per hour of labor.
A) $14.29
B) $48.11
C) $59.26
D) $300.00
Answer: B
Diff: 3 Page Ref: 112
Topic: The Marginal Products of Capital and Labor
Objective: LO1: Describe the aggregate production function.
Special Feature: none
AACSB: Analytic Skills
*: Recurring
23) The Cobb-Douglas production function represents real GDP as a function of all of the following variables except
A) capital.
B) labor.
C) the price level.
D) total factor productivity.
Answer: C
Diff: 1 Page Ref: 113
Topic: Calculating Total Factor Productivity
Objective: LO1: Describe the aggregate production function.
Special Feature: none
AACSB: Reflective Thinking Skills
*: Recurring
24) Suppose that the production function for the economy is Y = AK1/4L3/4. Assume that real GDP is $8,000 billion, capital stock is $32,000 billion, and the labor supply is 120 billion hours. Total factor productivity for this economy is
A) 0.011.
B) 16.5.
C) 21.33.
D) 60.
Answer: B
Diff: 2 Page Ref: 113
Topic: Calculating Total Factor Productivity
Objective: LO1: Describe the aggregate production function.
Special Feature: none
AACSB: Analytic Skills
*: Recurring
25) Diminishing marginal returns do not exist for increases in
A) capital stock.
B) labor.
C) total factor productivity.
D) Diminishing marginal returns exist for all of the above answers.
Answer: C
Diff: 1 Page Ref: 114
Topic: Changes in Capital, Labor, and Total Factor Productivity
Objective: LO1: Describe the aggregate production function.
Special Feature: none
AACSB: Reflective Thinking Skills
*: Recurring
Figure 4.1
26) Refer to Figure 4.1. All else equal, an increase in labor hours will cause a
A) shift from PF1 to PF2.
B) shift from PF2 to PF1.
C) movement up and to the right along PF1.
D) movement down and to the left along PF2.
Answer: C
Diff: 2 Page Ref: 115-116
Topic: Changes in Capital, Labor, and Total Factor Productivity
Objective: LO1: Describe the aggregate production function.
Special Feature: none
AACSB: Analytic Skills
*: Recurring
27) Refer to Figure 4.1. All else equal, an increase in total factor productivity will cause a
A) shift from PF1 to PF2.
B) shift from PF2 to PF1.
C) movement up and to the right along PF1.
D) movement down and to the left along PF2.
Answer: A
Diff: 2 Page Ref: 115-116
Topic: Changes in Capital, Labor, and Total Factor Productivity
Objective: LO1: Describe the aggregate production function.
Special Feature: none
AACSB: Analytic Skills
*: Recurring
28) Refer to Figure 4.1. All else equal, an increase in the capital stock will cause a
A) shift from PF1 to PF2.
B) shift from PF2 to PF1.
C) movement up and to the right along PF1.
D) movement down and to the left along PF2.
Answer: A
Diff: 2 Page Ref: 115-116
Topic: Changes in Capital, Labor, and Total Factor Productivity
Objective: LO1: Describe the aggregate production function.
Special Feature: none
AACSB: Analytic Skills
*: Recurring
29) Suppose that the production function is Y = AK0.35L0.65, current labor hours worked are 80,000 per year, the capital stock is $150,000, and real GDP is $750,000. What is the value of total factor productivity?
Answer:
Y = AK0.35L0.65, so A = Y / K0.35L0.65 = $750,000 / ($150,000)0.35(80,000)0.65 = 7.52.
Diff: 2 Page Ref: 109-111
Topic: The Marginal Products of Capital and Labor
Objective: LO1: Describe the aggregate production function.
Special Feature: none
AACSB: Reflective Thinking Skills
*: Recurring
30) Suppose that the production function is Y = AK2/5L3/5. Assume that real GDP is $5,000 billion, capital stock is $15,000 billion, and the labor supply is 75 billion hours. What are the values for the marginal product of labor and the marginal product of capital? Show this data graphically.
Answer:
MPK = 2/5 (Y/K) = 2/5 ($5,000 billion)/($15,000 billion) = $0.13 per dollar of capital.
MPL = 3/5 (Y/L) = 3/5 ($5,000 billion)/(75 billion) = $40 per hour of labor.
Diff: 2 Page Ref: 112-113
Topic: The Marginal Products of Capital and Labor
Objective: LO1: Describe the aggregate production function.
Special Feature: none
AACSB: Analytic Skills
*: Recurring
31) Suppose that the production function is Y = AK0.7L0.3, current labor hours worked are 80,000 per year, the capital stock is $150,000, and total factor productivity is 3. What is the value of real GDP? What will happen to real GDP if total factor productivity doubles?
Answer:
Y = AK0.7L0.3 = 3 ($150,000)0.7 x (80,000)0.3 = $372,657.42.
If total factor productivity doubles, GDP will also double, and will equal $745,314.84.
Diff: 2 Page Ref: 113
Topic: Calculating Total Factor Productivity
Objective: LO1: Describe the aggregate production function.
Special Feature: none
AACSB: Analytic Skills
*: Recurring
32) Suppose that the production function is Y = AK0.35L0.65, current labor hours worked are 80,000 per year, the capital stock is $150,000, and real GDP is $750,000. What is the value of total factor productivity?
Answer:
Y = AK0.35L0.65, so A = Y / K0.35L0.65 = $750,000 / ($150,000)0.35(80,000)0.65 = 7.52.
Diff: 2 Page Ref: 114
Topic: Calculating Total Factor Productivity
Objective: LO1: Describe the aggregate production function.
Special Feature: none
AACSB: Analytic Skills
*: Recurring
33) Suppose that the production function for an economy is Y = AK1/3L2/3. On one graph, show the production function undergoing two equal increases in labor hours, holding capital and total factor productivity constant, and on a second graph show the production function undergoing two equal increases in total factor productivity, holding capital and labor constant. Explain what happens to real GDP in each situation.
Answer:
On the first graph, the increase in labor hours will shift the production function up. The first increase in labor hours will shift the production function from PF1 to PF2, increasing real GDP from Y1 to Y2. The second, equal increase in labor hours will shift the production function from PF2 to PF3, increasing real GDP from Y2 to Y3. The second increase in labor hours does not shift the production function as much as the first increase does due to diminishing marginal returns to labor, so real GDP increases by a larger amount after the first increase in labor hours than it does after the second increase in labor hours.
On the second graph, the increase in total factor productivity will shift the production function up. The first increase in total factor productivity will shift the production function from PF1 to PF2, increasing real GDP from Y1 to Y2. The second, equal increase in total factor productivity will shift the production function from PF2 to PF3, increasing real GDP from Y2 to Y3. The second increase in total factor productivity shifts the production function as much as the first increase does because diminishing marginal returns do not apply to efficiency, so real GDP increases by the same amount after the first increase in total factor productivity as it does after the second increase in total factor productivity.
Diff: 2 Page Ref: 114-115
Topic: Changes in Capital, Labor, and Total Factor Productivity
Objective: LO1: Describe the aggregate production function.
Special Feature: Making the Connection: Foreign Direct Investment Increases Real GDP Growth in China
AACSB: Reflective Thinking Skills
4.2 A Model of Real GDP in the Long Run
1) If the marginal product of labor is less than the nominal wage divided by the price of output, a firm that wishes to maximize profits will
A) hire more labor.
B) lay off workers.
C) maintain its current level of workers.
D) raise the real wage.
Answer: B
Diff: 2 Page Ref: 117
Topic: The Markets for Capital and Labor
Objective: LO2: Explain how real GDP is determined in the long run.
Special Feature: none
AACSB: Reflective Thinking Skills
*: Recurring
2) 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
A) purchase more capital goods.
B) purchase fewer capital goods.
C) maintain the current level of capital goods.
D) allow capital goods to wear out without purchasing additional capital goods.
Answer: A
Diff: 2 Page Ref: 117
Topic: The Markets for Capital and Labor
Objective: LO2: Explain how real GDP is determined in the long run.
Special Feature: none
AACSB: Reflective Thinking Skills
*: Recurring
3) A firm that wishes to maximize profits will continue to hire labor until the
A) real wage = MPL.
B) nominal wage = MPL.
C) nominal wage = the real wage.
D) nominal wage = the price level.
Answer: A
Diff: 1 Page Ref: 117
Topic: The Markets for Capital and Labor
Objective: LO2: Explain how real GDP is determined in the long run.
Special Feature: none
AACSB: Reflective Thinking Skills
*: Recurring
4) A firm that wishes to maximize profits will continue to purchase capital goods until the
A) nominal rental price of capital = MPK.
B) real rental price of capital = MPK.
C) nominal rental price of capital = the real rental price of capital.
D) nominal rental price of capital = the price level.
Answer: B
Diff: 1 Page Ref: 117
Topic: The Markets for Capital and Labor
Objective: LO2: Explain how real GDP is determined in the long run.
Special Feature: none
AACSB: Reflective Thinking Skills
*: Recurring
5) Suppose that the production function for the economy is Y = AK0.5L0.5. If the capital stock = 40,000, the quantity of labor = 10,000, and the efficiency index = 3, real GDP is
A) $60,000.
B) $75,000.
C) $150,000.
D) $300,000.
Answer: A
Diff: 2 Page Ref: 117
Topic: The Markets for Capital and Labor
Objective: LO2: Explain how real GDP is determined in the long run.
Special Feature: none
AACSB: Analytic Skills
*: Recurring
6) Suppose that the production function for the economy is Y = AK0.5L0.5. If the capital stock = 40,000, the quantity of labor = 10,000, and the efficiency index = 3, the equilibrium real wage is
A) $3.
B) $4.50.
C) $9.
D) $16.67.
Answer: A
Diff: 2 Page Ref: 117
Topic: The Markets for Capital and Labor
Objective: LO2: Explain how real GDP is determined in the long run.
Special Feature: none
AACSB: Analytic Skills
*: Recurring
7) Suppose that the production function for the economy is Y = AK0.5L0.5. If the capital stock = 40,000, the quantity of labor = 10,000, and the efficiency index = 3, the equilibrium real rental price of capital is
A) $0.33.
B) $0.75.
C) $1.00.
D) $2.22.
Answer: B
Diff: 2 Page Ref: 117
Topic: The Markets for Capital and Labor
Objective: LO2: Explain how real GDP is determined in the long run.
Special Feature: none
AACSB: Analytic Skills
*: Recurring
8) Suppose that the production function for the economy is Y = AK0.2L0.8. If the capital stock = 40,000, the quantity of labor = 10,000, and the efficiency index = 1, real GDP is
A) $13,195.08.
B) $16,000.00.
C) $16,946.34.
D) $28,000.00.
Answer: A
Diff: 2 Page Ref: 117
Topic: The Markets for Capital and Labor
Objective: LO2: Explain how real GDP is determined in the long run.
Special Feature: none
AACSB: Analytic Skills
*: Recurring
9) Suppose that the production function for the economy is Y = AK0.2L0.8. If the capital stock = 40,000, the quantity of labor = 10,000, and the efficiency index = 1, the marginal product of labor is
A) $0.80.
B) $1.06.
C) $1.32.
D) $5.26.
Answer: B
Diff: 2 Page Ref: 117
Topic: The Markets for Capital and Labor
Objective: LO2: Explain how real GDP is determined in the long run.
Special Feature: none
AACSB: Analytic Skills
*: Recurring
10) Suppose that the production function for the economy is Y = AK0.2L0.8. If the capital stock = 40,000, the quantity of labor = 10,000, and the efficiency index = 1, the marginal product of capital is
A) $0.066.
B) $0.20.
C) $1.05.
D) $1.58.
Answer: A
Diff: 2 Page Ref: 117
Topic: The Markets for Capital and Labor
Objective: LO2: Explain how real GDP is determined in the long run.
Special Feature: none
AACSB: Analytic Skills
*: Recurring
11) The supply curves for labor and capital are ________ and the demand curves for labor and capital are ________.
A) upward sloping; downward sloping
B) vertical; horizontal
C) vertical; downward sloping
D) upward sloping; vertical
Answer: C
Diff: 1 Page Ref: 117-118
Topic: The Markets for Capital and Labor
Objective: LO2: Explain how real GDP is determined in the long run.
Special Feature: none
AACSB: Reflective Thinking Skills
*: Recurring
12) 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 ________.
A) increase; increase
B) increase; not change
C) decrease; decrease
D) not change; increase
Answer: B
Diff: 2 Page Ref: 118
Topic: The Markets for Capital and Labor
Objective: LO2: Explain how real GDP is determined in the long run.
Special Feature: none
AACSB: Reflective Thinking Skills
*: Recurring
13) All else equal, if the demand for capital decreases and the supply of capital does not change, the equilibrium real rental cost of capital will ________ and the equilibrium quantity of capital will ________.
A) increase; increase
B) decrease; not change
C) decrease; decrease
D) not change; decrease
Answer: B
Diff: 2 Page Ref: 118
Topic: The Markets for Capital and Labor
Objective: LO2: Explain how real GDP is determined in the long run.
Special Feature: none
AACSB: Reflective Thinking Skills
*: Recurring
14) Explain how firms choose the amount of capital goods to purchase and the amount of labor to hire.
Answer: To maximize profits, firms will purchase capital goods as long as the capital goods produce more output than the firm has to pay for the capital goods. As long as the real rental price of capital is less than the marginal product of capital, firms will continue to purchase capital goods. Firms will purchase capital goods up to the point where the marginal product of capital is equal to the real rental price of capital. Firms will hire as long as the labor produces more output than the firm has to pay for the labor. As long as the real wage is less than the marginal product of labor, firms will continue to hire labor. Firms will hire labor up to the point where the marginal product of labor is equal to the real wage.
Diff: 2 Page Ref: 117-118
Topic: The Markets for Capital and Labor
Objective: LO2: Explain how real GDP is determined in the long run.
Special Feature: none
AACSB: Reflective Thinking Skills
*: Recurring
15) Explain the relationships between the marginal product of labor and the demand for labor, and the marginal product of capital and the demand for capital.
Answer: The marginal product of labor is the extra output a firm receives from adding one more unit of labor, holding all other inputs and efficiency constant. Firms hire workers up to the point where the marginal product of labor equals the real wage, and since the real wage is determined by the demand for labor, the marginal product of labor is the demand for labor. The marginal product of capital is the extra output a firm receives from adding one more unit of capital, holding all other inputs and efficiency constant. Firms purchase capital up to the point where the marginal product of capital equals the real rental price of capital, and since the real rental price of capital is determined by the demand for capital, the marginal product of capital is the demand for capital.
Diff: 2 Page Ref: 117-118
Topic: The Markets for Capital and Labor
Objective: LO2: Explain how real GDP is determined in the long run.
Special Feature: none
AACSB: Reflective Thinking Skills
*: Recurring
16) Suppose that the production function for the economy is Y = AK0.25L0.75, A = 2, K = 100,000, and L = 60,000. What are the values of real GDP, the real wage, and the real rental cost of capital? Show this data using graphs of the aggregate production function, the aggregate capital market, and the aggregate labor market.
Answer:
Real GDP = 2(100,000)0.25(60,000)0.75 = $136,346.32.
Real wage = MPL= 0.75($136,346.32 / 60,000) = $1.70.
Real rental cost of capital = MPK = 0.25($136,346.32 / 100,000) = $0.34.
Diff: 2 Page Ref: 118-119
Topic: Combining the Factor Markets with the Aggregate Production Function
Objective: LO2: Explain how real GDP is determined in the long run.
Special Feature: none
AACSB: Analytic Skills
*: Recurring
4.3 Accounting for Growth in Real GDP
1) Suppose that the production function for the economy is Y = AK1/5L4/5. The basic growth accounting equation for this economy is
A) gY = gA + (1/5)gK + (4/5)gL.
B) gY = gA + gK1/5 + gL4/5.
C) gY = gA + (1/5)gK1/5 + (4/5)gL4/5.
D) gY = gA + gK4/5 + gL1/5.
Answer: A
Diff: 2 Page Ref: 121
Topic: Accounting for Real GDP Growth
Objective: LO3: Discuss the contribution of capital, labor, and efficiency to the growth rate of real GDP.
Special Feature: none
AACSB: Reflective Thinking Skills
*: Recurring
2) Suppose that the production function for the economy is Y = AK0.2L0.8. If the growth rate of the capital stock = 4.25%, the growth rate of labor = 2.5%, and the growth rate of factor productivity = 1.25%, the contribution of capital to the growth of real GDP is
A) 0.85%.
B) 1.34%.
C) 1.68%.
D) 4.25%.
Answer: A
Diff: 2 Page Ref: 121
Topic: Accounting for Real GDP Growth
Objective: LO3: Discuss the contribution of capital, labor, and efficiency to the growth rate of real GDP.
Special Feature: none
AACSB: Reflective Thinking Skills
*: Recurring
3) Suppose that the production function for the economy is Y = AK0.2L0.8. If the growth rate of the capital stock = 4.25%, the growth rate of labor = 2.5%, and the growth rate of factor productivity = 1.25%, the contribution of labor to the growth of real GDP is
A) 2.0%.
B) 2.08%.
C) 2.5%.
D) 2.6%.
Answer: A
Diff: 2 Page Ref: 121
Topic: Accounting for Real GDP Growth
Objective: LO3: Discuss the contribution of capital, labor, and efficiency to the growth rate of real GDP.
Special Feature: none
AACSB: Reflective Thinking Skills
*: Recurring
4) Suppose that the production function for the economy is Y = AK0.2L0.8. If the growth rate of the capital stock = 4.25%, the growth rate of labor = 2.5%, and the growth rate of factor productivity = 1.25%, the contribution of total factor productivity to the growth of real GDP is
A) 1.25%.
B) 3.48%.
C) 4.1%.
D) 8.0%.
Answer: A
Diff: 2 Page Ref: 121
Topic: Accounting for Real GDP Growth
Objective: LO3: Discuss the contribution of capital, labor, and efficiency to the growth rate of real GDP.
Special Feature: none
AACSB: Reflective Thinking Skills
*: Recurring
5) Suppose that the production function for the economy is Y = AK0.2L0.8. If the growth rate of the capital stock = 4.25%, the growth rate of labor = 2.5%, and the growth rate of factor productivity = 1.25%, the growth rate of real GDP is
A) 1.25%.
B) 4.00%.
C) 4.67%.
D) 5.84%.
Answer: B
Diff: 3 Page Ref: 121
Topic: Accounting for Real GDP Growth
Objective: LO3: Discuss the contribution of capital, labor, and efficiency to the growth rate of real GDP.
Special Feature: none
AACSB: Reflective Thinking Skills
*: Recurring
6) Suppose that the production function for the economy is Y = AK0.4L0.6. If the growth rate of real GDP = 3.92%, the growth rate of the capital stock = 3.4%, the growth rate of labor = 2.1%, and the growth rate of factor productivity = 1.3%, the relative share of capital growth to the growth of real GDP is
A) 34.7%.
B) 41.6%.
C) 46.1%.
D) 86.7%.
Answer: A
Diff: 2 Page Ref: 123-124
Topic: Accounting for Labor Productivity Growth
Objective: LO3: Discuss the contribution of capital, labor, and efficiency to the growth rate of real GDP.
Special Feature: Solved Problem 4.3: Accounting for Labor Productivity Growth
AACSB: Reflective Thinking Skills
7) Suppose that the production function for the economy is Y = AK0.4L0.6. If the growth rate of real GDP = 3.92%, the growth rate of the capital stock = 3.4%, the growth rate of labor = 2.1%, and the growth rate of factor productivity = 1.3%, the relative share of labor to the growth of real GDP is
A) 11.2%.
B) 32.1%.
C) 39.8%.
D) 53.6%.
Answer: B
Diff: 2 Page Ref: 123-124
Topic: Accounting for Labor Productivity Growth
Objective: LO3: Discuss the contribution of capital, labor, and efficiency to the growth rate of real GDP.
Special Feature: Solved Problem 4.3: Accounting for Labor Productivity Growth
AACSB: Reflective Thinking Skills
8) Suppose that the production function for the economy is Y = AK0.4L0.6. If the growth rate of real GDP = 3.92%, the growth rate of the capital stock = 3.4%, the growth rate of labor = 2.1%, and the growth rate of factor productivity = 1.3%, the relative share of total factor productivity growth to the growth of real GDP is
A) 9.3%.
B) 28.3%.
C) 30.2%.
D) 33.2%.
Answer: D
Diff: 2 Page Ref: 123-124
Topic: Accounting for Labor Productivity Growth
Objective: LO3: Discuss the contribution of capital, labor, and efficiency to the growth rate of real GDP.
Special Feature: Solved Problem 4.3: Accounting for Labor Productivity Growth
AACSB: Reflective Thinking Skills
9) Suppose that the production function for the economy is Y = AK0.3L0.7, the growth rate of real GDP = 3.83%, the growth rate of the capital stock = 4.7%, the growth rate of labor = 1.6%, and the growth rate of factor productivity = 1.3%. Calculate the contributions of capital, labor and total factor productivity to the growth rate of real GDP, and calculate the relative shares of capital growth, labor, and total factor productivity growth to the growth rate of real GDP.
Answer:
Contribution of capital = 0.3 x 4.7 = 1.41.
Contribution of labor = 0.7 x 1.6 = 1.12.
Contribution of total factor productivity = 1.3.
Relative share of capital growth = 0.3(4.7 / 3.83) = 36.8%.
Relative share of labor = 0.7(1.6 / 3.83) = 29.2%.
Relative share of total factor productivity = (1.3 / 3.83) = 33.9%
Diff: 2 Page Ref: 121-122
Topic: Accounting for Real GDP Growth
Objective: LO3: Discuss the contribution of capital, labor, and efficiency to the growth rate of real GDP.
Special Feature: none
AACSB: Analytic Skills
*: Recurring
10) The production function for the nation of Fredonia is Y = AK0.2L0.8, the growth rate of real GDP per hour worked = 2.75%, the growth rate of capital per hour worked = 5.4% and the growth rate of factor productivity = 1.7%. Explain which determinant is the most important in determining GDP per hour worked in Fredonia.
Answer:
Contribution of capital per hour worked = 0.2 x 5.4 = 1.08.
Contribution of total factor productivity = 1.7.
Relative share of capital per hour worked = 0.2(5.4 / 2.75) = 39%.
Relative share of total factor productivity = (1.7 / 2.75) = 61%.
The contribution of total factor productivity and the relative share of total factor productivity are larger than the contribution and relative share of capital per hour worked, so total factor productivity is the most important determinant.
Diff: 2 Page Ref: 123-124
Topic: Accounting for Real GDP Growth
Objective: LO3: Discuss the contribution of capital, labor, and efficiency to the growth rate of real GDP.
Special Feature: Making the Connection: What Explains Recent Economic Growth in India?
AACSB: Analytic Skills
4.4 GDP per Hour Worked Among Countries
1) Suppose Canada and Thailand have the same level of total factor productivity and capital's share of income. If capital per worker is greater in Canada than in Thailand, the slope of the production function is steeper for ________, and capital will flow to ________.
A) Canada; Canada
B) Canada; Thailand
C) Thailand; Thailand
D) Thailand; Canada
Answer: C
Diff: 2 Page Ref: 127
Topic: GDP per Hour Worked Among Countries
Objective: LO4: Understand that differences in efficiency explain differences in labor productivity across countries.
Special Feature: none
AACSB: Reflective Thinking Skills
*: Recurring
2) Suppose Canada and Thailand have the same level of total factor productivity and capital's share of income. If capital per worker is greater in Canada than in Thailand, real GDP per hour worked in ________ will tend to ________.
A) Canada; increase
B) Canada; decrease
C) Thailand; increase
D) Thailand; decrease
Answer: C
Diff: 2 Page Ref: 127
Topic: GDP per Hour Worked Among Countries
Objective: LO4: Understand that differences in efficiency explain differences in labor productivity across countries.
Special Feature: none
AACSB: Reflective Thinking Skills
*: Recurring
3) Suppose Canada and Thailand have the same level of total factor productivity and capital's share of income. If capital per worker is greater in Canada than in Thailand, the standard of living will be greater in ________ , as measured by ________.
A) Canada; real GDP per worker
B) Canada; nominal GDP per worker
C) Thailand; real GDP per worker
D) Thailand; nominal GDP per worker
Answer: A
Diff: 2 Page Ref: 127
Topic: GDP per Hour Worked Among Countries
Objective: LO4: Understand that differences in efficiency explain differences in labor productivity across countries.
Special Feature: Chapter Opener: The Surprising Economic Rise of India
AACSB: Reflective Thinking Skills
Figure 4.6
4) Refer to Figure 4.6. Suppose the figure represents the production function for Jamaica. If the U.S.-based Vroom motor company decides to build a manufacturing plant in Jamaica, the increase in ________ that will result from the investment will cause ________.
A) capital goods; an upward shift of the production function
B) capital goods; a movement up along the production function
C) technology; a movement up along the production function
D) technology; the production function to become steeper
Answer: B
Diff: 2 Page Ref: 127
Topic: GDP per Hour Worked Among Countries
Objective: LO4: Understand that differences in efficiency explain differences in labor productivity across countries.
Special Feature: An Inside Look: GM Expanding Production in India
AACSB: Reflective Thinking Skills
5) Refer to Figure 4.6. Suppose the figure represents the production function for Jamaica. If the U.S.-based Vroom motor company decides to build a manufacturing plant in Jamaica, the increase in ________ that will result from the investment will cause ________.
A) capital goods; an upward shift of the production function
B) capital goods; the production function to become steeper
C) technology; a movement up along the production function
D) technology; an upward shift of the production function
Answer: D
Diff: 2 Page Ref: 127
Topic: GDP per Hour Worked Among Countries
Objective: LO4: Understand that differences in efficiency explain differences in labor productivity across countries.
Special Feature: An Inside Look: GM Expanding Production in India
AACSB: Reflective Thinking Skills
Figure 4.7
6) Refer to Figure 4.7. Assume that capital's share of income is the same in the United States and Panama. The differences in real GDP per worker in the United States and Panama can be explained primarily by
A) greater total factor productivity in the United States.
B) greater total factor productivity in Panama.
C) a larger labor force in the United States.
D) a larger labor force in Panama.
Answer: A
Diff: 2 Page Ref: 128
Topic: GDP per Hour Worked Among Countries
Objective: LO4: Understand that differences in efficiency explain differences in labor productivity across countries.
Special Feature: none
AACSB: Analytic Skills
*: Recurring
7) Refer to Figure 4.7. Assume that capital's share of income is the same in the United States and Panama. If the United States is currently at point Aand Panama is currently at point C, capital will flow to ________ and capital per hour worked in Panama will ________.
A) the United States; rise
B) the United States; fall
C) Panama; rise
D) Panama; fall
Answer: C
Diff: 2 Page Ref: 128
Topic: GDP per Hour Worked Among Countries
Objective: LO4: Understand that differences in efficiency explain differences in labor productivity across countries.
Special Feature: none
AACSB: Analytic Skills
*: Recurring
8) Refer to Figure 4.7. Assume that capital's share of income is the same in the United States and Panama, and the slopes of the production functions are the same at points A and B. If the United States is currently at point A and Panama is currently at point C, capital will flow to Panama until
A) The United States reaches point C.
B) Panama reaches point A.
C) the United States reaches point B.
D) Panama reaches point B.
Answer: D
Diff: 2 Page Ref: 128
Topic: GDP per Hour Worked Among Countries
Objective: LO4: Understand that differences in efficiency explain differences in labor productivity across countries.
Special Feature: none
AACSB: Analytic Skills
*: Recurring
9) Refer to Figure 4.7. Assume that capital's share of income is the same in the United States and Panama, and the slopes of the production functions are the same at points A and B. The rates of return to capital are equalized when
A) kUS > k'Panama.
B) kUS = k'Panama.
C) k'Panama > kUS.
D) kPanama = k'Panama.
Answer: A
Diff: 2 Page Ref: 128
Topic: GDP per Hour Worked Among Countries
Objective: LO4: Understand that differences in efficiency explain differences in labor productivity across countries.
Special Feature: none
AACSB: Analytic Skills
*: Recurring
10) Refer to Figure 4.7. Assume that capital's share of income is the same in the United States and Panama, and the slopes of the production functions are the same at points A and B. If kUS = k'Panama, the marginal product of capital would be
A) equal in both countries due to the convergence of total factor productivity.
B) higher in the United States due to the higher level of total factor productivity.
C) equal in both countries, ending the capital flow to Panama.
D) higher in Panama due to the continued flow of capital to Panama.
Answer: B
Diff: 2 Page Ref: 128
Topic: GDP per Hour Worked Among Countries
Objective: LO4: Understand that differences in efficiency explain differences in labor productivity across countries.
Special Feature: none
AACSB: Analytic Skills
*: Recurring
Table 4.1
| Country | Capital per worker | Total factor productivity |
| Terra Firma | $70,000 | 7.4 |
| Aquaria | 115,000 | 12.2 |
11) Refer to Table 4.1. Assume the production function for real GDP per worker is y = Ak0.5 for both countries. The rate of return for capital in Terra Firma is
A) 0.001.
B) 0.014.
C) 0.021.
D) 0.032.
Answer: B
Diff: 2 Page Ref: 130
Topic: A Numerical Example
Objective: LO4: Understand that differences in efficiency explain differences in labor productivity across countries.
Special Feature: none
AACSB: Analytic Skills
*: Recurring
12) Refer to Table 4.1. Assume the production function for real GDP per worker is y = Ak0.5 for both countries. The rate of return for capital in Aquaria is
A) 0.006.
B) 0.018.
C) 0.023.
D) 0.030.
Answer: B
Diff: 2 Page Ref: 130
Topic: A Numerical Example
Objective: LO4: Understand that differences in efficiency explain differences in labor productivity across countries.
Special Feature: none
AACSB: Analytic Skills
*: Recurring
13) If two countries have the same levels of capital's share of income and total factor productivity, rates of return to capital ________, and GDP per worker ________.
A) do converge to the same values; does not converge to the same level.
B) do not converge to the same values; does not converge to the same level.
C) do converge to the same values; does converge to the same level.
D) do not converge to the same values; does converge to the same level.
Answer: C
Diff: 2 Page Ref: 130
Topic: A Numerical Example
Objective: LO4: Understand that differences in efficiency explain differences in labor productivity across countries.
Special Feature: none
AACSB: Reflective Thinking Skills
*: Recurring
14) If two countries have the same level of capital's share of income, but total factor productivity varies in these countries, rates of return to capital ________, and GDP per worker ________.
A) do converge to the same values; does not converge to the same level.
B) do not converge to the same values; does not converge to the same level.
C) do converge to the same values; does converge to the same level.
D) do not converge to the same values; does converge to the same level.
Answer: A
Diff: 2 Page Ref: 131
Topic: A Numerical Example
Objective: LO4: Understand that differences in efficiency explain differences in labor productivity across countries.
Special Feature: none
AACSB: Reflective Thinking Skills
*: Recurring
15) What are three sources that can explain differences in real GDP per worker in different countries?
Answer: Three sources that can explain differences in real GDP per worker in different countries are differences in capital per hour worked, or the capital-labor ratio, differences in total factor productivity, and differences in capital's share of income.
Diff: 1 Page Ref: 127-128
Topic: GDP per Hour Worked Among Countries
Objective: LO4: Understand that differences in efficiency explain differences in labor productivity across countries.
Special Feature: Key Issue and Question: What Are the Main Factors That Determine the Growth Rate of Real GDP?
AACSB: Reflective Thinking Skills
16) Suppose the United States and Panama have the same level of total factor productivity and capital's share of income. Draw a production function showing a greater level of capital per worker in the United States than in Panama. Explain what will happen to the flow of capital between the two countries, and show the changes on the graph.
Answer:
Since both countries have the same level of total factor productivity and capital's share of income, they can be represented with the same production function. Since capital per worker is greater in the United States than in Panama, kUS > kPanama, and therefore real GDP per worker is greater in the United States (yUS) than in Panama (yPanama). This is represented on the graph by point A for the United States and point Bfor Panama. The slope of the production function is steeper at point Bthan at point A, and the slope of the production function is the rate of return to capital. Since the rate of return to capital is therefore greater in Panama, capital will flow to Panama, raising real GDP per hour worked in Panama until it converges with real GDP per hour worked in the United States. This will occur where yUS = y'Panama. At this level of real GDP, capital per worker will also converge, kUS = k'Panama, and both countries will end up at point B.
Diff: 2 Page Ref: 127
Topic: GDP per Hour Worked Among Countries
Objective: LO4: Understand that differences in efficiency explain differences in labor productivity across countries.
Special Feature: none
AACSB: Reflective Thinking Skills
*: Recurring
17) The production function for real GDP per worker is y = Ak2/5 for both Metropolis and Gotham. The capital-labor ratio is $9.45 for Metropolis and it is $12.25 for Gotham. Real GDP per worker is $6.35 for Metropolis and it is $8.02 for Gotham. Calculate total factor productivity for each country and the return on capital in each country. If both nations have the same level of capital's share of income, which direction will capital flow between these two countries? Will real GDP per worker in these countries ever converge? Explain.
Answer:
Total factor productivity for Metropolis = $6.35 / $9.452/5 = 2.59.
Total factor productivity for Gotham = $8.02 / $12.252/5 = 2.94.
Return on capital in Metropolis = 2/5[2.59(9.45)2/5] / 9.45 = 0.27.
Return on capital in Gotham = 2/5[2.94(12.25)2/5] / 12.25 = 0.26.
Since the return on capital is greater in Metropolis, capital will flow from Gotham to Metropolis. Since total factor productivity is not the same in both countries, real GDP per worker in these countries will not converge.
Diff: 2 Page Ref: 129
Topic: A Numerical Example
Objective: LO4: Understand that differences in efficiency explain differences in labor productivity across countries.
Special Feature: Making the Connection: Will Indian Workers Become More Productive Than U.S. Workers?
AACSB: Analytic Skills
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