ECON 214 Problem Set 5 solutions complete answers

ECON 214 Problem Set 5 solutions complete answers 

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Question 1

 

Please read the article below, and use the information in the article to answer the following questions.

 

The Olympics Don’t Have to Be a Disaster by Megan McArdle

 

Suppose that two cities have identical economies that can both be represented by the graph below. Also, suppose that initially they are both at a steady-state equilibrium characterized by a Y2 level of real GDP and a K2 level of capital. To keep our example easy to follow, we will refer to the cities as City 3 and City 4.

 

Part 1

 

Suppose that City 3, in preparation for the Olympics, makes a huge investment in infrastructure and buildings that increase the city’s capital to K3. With a K3 level of capital, real GDP in City 3 will be 

 

Part 2

 

Next, suppose that City 4 hosts the next Olympics and in preparation for the games makes its own investments in infrastructure, which increase its level of capital to K4. With a K4 level of capital, real GDP in City 4 will be

 

Part 3

 

The extra investment by each city will allow         to obtain a higher level of real GDP.

 

Part 4

 

When these cities reach their steady-state equilibrium after their Olympics investments,        will have a higher level of real GDP. 

 

Question 2

 

As you learned in this chapter, the amount of capital that a nation utilizes can affect economic growth. Two other factors that affect economic growth are technology and institutions. Let’s see how well you understand how these three factors influence economic growth.

 

Part 1

 

Although additional capital will lead to economic growth, there are limits. In other words, increases in capital alone cannot lead to sustained economic growth. This result is due to the fact that there are        to capital.

 

Part 2

 

The figure below illustrates growth from Y1 to Y2 due to a shift in the production function from F1 to F2. This shift is most likely due to

 

Part 3

 

Question 3

 

Part 1

 

Now, suppose the city is picked to host the Olympics, and it starts to make investments to get ready, causing the city to operate along F1. Consider several possible choices available to the city about how much investment it should make. All of these choices will place the city's economy along F1.

 

First, suppose the city decides to keep its level of capital at K1. In this case, the investments directed toward preparing for the Olympics simply displace other investments that would have occured. The city’s real GDP will be

 

Part 2

 

If, instead, the city increases its investment so that its level of capital is K2, real GDP will become

 

Part 3

 

Now let the city adopt a different option and increase its investments so that capital is K3. In this case, real GDP will be

 

Part 4

 

Compared to the initial starting position depicted by Point B, which of the following scenarios is true? When answering this question, remember that the economy is operating on F1 when it invests at the levels given by K2 or K3.

 

Question 4

 

If motorcycle producers adhered to the Solow growth model, which items would they view as important to economic growth?

 

Question 5

 

The aggregate production function shown below graphs the relationship between output (Y, or real GDP) and capital inputs (K). The shape of the production function illustrates two important concepts related to economic growth. You will want to refer to the figure for the questions below.

 

Part 1

 

Because the production function has a positive slope, the marginal product of capital is   

 

Part 2

 

Because the slope of the production function becomes flatter as more capital is added, the marginal product of capital is    

 

Part 3

 

As capital increases from one to two units, the marginal product of the second unit of capital is    

 

Part 4

 

As capital increases from three to four units, the marginal product of the fourth unit of capital is     

 

Question 6

 

Consider two economies, one developing and one developed. Both economies have access to the production function shown below, but the developed economy utilizes four units of capital, while the developing country utilizes one unit of capital.

 

Part 1

 

According to the Solow growth model, you would expect the        to be closer to its steady state.

 

Part 2

 

According to the Solow model, investment in the        would yield relatively greater returns.

 

Part 3

 

The Solow model predicts that, over time, real GDP in developing economies could potentially converge to the same level of real GDP as developed economies. Which of the following is not consistent with convergence?

 

Question 7

 

The production function for an entire economy is typically viewed as an aggregate of all the microeconomic firm-level production functions. The figure below depicts such an aggregate production function for an economy. The economy is currently at point A in the figure.

 

Using your knowledge of the Solow model of economic growth, what would be the effect on the aggregate production function of an increase in the number of workers in this economy (as a result of increased immigration)? Shift the curve to depict the impact of the increase in the number of workers.

 

Question 8

 

The graph below shows three different production functions: F1, F2, and F3. Assume that a nation begins with production function F1. Production function F2 is a parallel shift upward from F1; in contrast, F3 is an increase in the slope from F1.

 

For each of the following scenarios, determine which of the two new production functions, F2 or F3, better illustrates how the scenario would affect production.

 

Part 1

 

Human capital rises through education. 

 

A new program to develop work-related skills is offered in public schools.

 

Part 2

 

New agricultural technology is applied.

 

New robotic assembly lines are created. 

 

Part 3

 

New natural gas reserves are located.

 

New offshore oil deposits are found. 

 

Question 9

 

The graph above portrays the production function of a small economy wherein produce from trees makes up the majority of output. 

 

The marginal product of the second ladder is       , and diminishing marginal product sets in with ladder number       .

 

Question 10

 

The Solow model of economic growth relates GDP to the factors of production and level of technology in an economy. The more factors of production, or the higher the level of technology, the more output the economy can produce. However, the factors of production exhibit diminishing marginal product. Focusing only on capital resources, the following table provides the amount of output that a country can produce with different levels of capital.

 

Use the information provided in the table to plot the aggregate production function on the graph below, which will exhibit positive but diminishing marginal returns. Use the curved-line tool at the first point, midpoint, and end point to draw the function.

 

Question 11

 

Part 1

 

The following graph depicts two countries, country A and country B. Country A is a relatively poor country with low levels of capital and is currently at point A. Country B is a relatively rich country with high levels of capital and is currently at point B.

 

Suppose that both countries increase their amount of capital by 100 units. In the graph below, use the point tool to mark the new point on the production function for both country A and country B (it is not necessary to label the points).

 

Part 2

 

Why is the increase in GDP for country B smaller than the increase in GDP for country A?

 

Question 12

 

The production function for an entire economy is typically viewed as an aggregate of all the microeconomic firm-level production functions. The figure below depicts such an aggregate production function for an economy. The economy is currently at point A in the figure below.

 

In 2011, a major earthquake and tsunami in Japan destroyed significant physical capital, including roads, homes, factories, and bridges. Using your knowledge of the Solow model of economic growth, what would be the effect on the aggregate production function of such a destruction of physical capital in Japan? Shift the curve, or shift the point on the production function, to depict the impact of the destruction of physical capital.

 

Question 13

 

       returns in the U.S. economy’s aggregate production function have allowed the Chinese economy to        the U.S. economy, primarily as a result of the increase in capital and        institutions in China.

 

Question 14

 

Suppose the small island nation of Hewes produces only apple cider, which is made with machines called cider presses. This table shows how the output of cider increases as the number of cider presses increases.

 

Question 15

 

The production function for an entire economy is typically viewed as an aggregate of all the microeconomic firm-level production functions. The figure below depicts such an aggregate production function for an economy. The economy is currently at point A.

 

While Solow growth theory emphasizes the importance of the factors of production and technology, modern growth theory emphasizes the importance of institutions.

 

Using your knowledge of Solow growth theory and modern growth theory, what would be the effect on the aggregate production function of the imposition of trade restrictions? Shift the curve to depict the impact of the imposition of trade restrictions.

 

Question 16

 

Sort the following institutions by whether they help or hinder growth.

 

Question 17

 

Sort the following events by whether they would lead to an increase in the production function (from F1 to F2) or a decrease in the production function (from F2 to F1).

 

Events (4 items) (Drag and drop into the appropriate area below)