Question 1

Suppose that real GDP grew more in El Dorado than in Atlantis last year. What does this imply concerning productivity or standard of living?

Accepted Answer

If the population growth rates are the same, then faster GDP growth in El Dorado implies faster productivity growth. However, without knowing population growth rates, we cannot conclude about productivity or standard of living directly.

Question 2

Suppose you build bird houses. One day, you double the time you spend building and double the wood, nails, paint, and all the other inputs in order to build twice as many bird houses. What kind of production function is this?

Accepted Answer

Doubling all inputs to double the output indicates constant returns to scale, meaning output increases in direct proportion to inputs.

Question 3

What is one of the consequences of accumulating capital?

Accepted Answer

Accumulating capital requires investment in production, which means sacrificing current consumption in order to generate future benefits. This can lead to short-term decreases in consumption levels, but in the long run, it can lead to higher levels of production and consumption.

Question 4

If there are constant returns to scale, how is the production function written?

Accepted Answer

Constant returns to scale mean that increasing all inputs by a certain factor will result in an equivalent increase in output. The production function for constant returns to scale is homogeneous of degree 1 in inputs. Choice C represents this property with all inputs being divided by L, and output being divided by L as well, resulting in a production function that is homogeneous of degree 1 in inputs.

Question 5

Your company discovers a better way to produce lawn mowers, but your better methods are not apparent from the lawn mowers themselves. What kind of knowledge is this?

Accepted Answer

The fact that the better methods are not apparent from the lawn mowers themselves suggests that they are proprietary knowledge. Additionally, because the methods relate to the production of the lawn mowers, they are likely to be technological in nature.

Question 6

How can a government encourage growth and, in the long run, raise the country's economic standard of living?

Accepted Answer

Encouraging saving and investment can lead to the growth of businesses and industries, increasing employment opportunities and overall economic activity. It also leads to the accumulation of capital which can be used to improve infrastructure and productivity, ultimately resulting in an increase in the country's economic standard of living. Encouraging population growth and consumption may provide temporary boosts to the economy, but may not be sustainable in the long run. Increasing government spending can lead to inflation and a larger national debt, which can have negative impacts on the economy.

Question 7

A management professor discovers a way for corporate management to operate more efficiently. He publishes his findings in a journal. How are his findings best defined?

Accepted Answer

The answer of A management professor discovers a way for...

Question 8

Which statement best defines technological knowledge?

Accepted Answer

Technological knowledge refers to the available information on how to produce things, including the processes and techniques involved. It is different from human capital, which encompasses a broader range of skills and knowledge possessed by individuals. The resources expended in transmitting technological knowledge to the workforce may include training programs, education, and research and development activities. While computer literacy may be a component of technological knowledge, it is not the only or defining element.

Question 9

Using the production function and notation in the text, what does K/L measure?

Accepted Answer

K/L measures physical capital per worker, as K represents capital and L represents labor (or workers).

Question 10

Which terms refers to the relationship between the quantity of output created and the quantity of inputs needed to create it?

Accepted Answer

The production function refers to the relationship between the quantity of output created and the quantity of inputs needed to create it, such as labor, capital, and technology. The other options are related concepts but do not specifically refer to this relationship.

Question 11

Which statement best explains how investment and growth rates relate across countries?

Accepted Answer

Investment and growth rates are positively related across countries. This is because investment is a key driver of economic growth, as it allows for the expansion of production capacity and the creation of new jobs, leading to higher output and incomes. Countries that invest more tend to see higher rates of economic growth, while those that invest less tend to experience slower growth.

Question 12

If the number of workers in an economy doubled, all other inputs stayed the same, and there were constant returns to scale, what would happen to productivity?

Accepted Answer

The answer of If the number of workers in an...

Question 13

If a production function has constant returns to scale, how can output be doubled?

Accepted Answer

Doubling all of the inputs in a production function with constant returns to scale will double the output, as the output increases in the same proportion as the increase in inputs.

Question 14

Suppose that over the past ten years productivity grew faster in Cayo than in San Marcos and the population of both countries was unchanged. What can we conclude?

Accepted Answer

Productivity is a measure of output per worker, so if productivity grew faster in Cayo than in San Marcos and the population was unchanged, then real GDP per person must have grown faster in Cayo. However, we cannot conclude that real GDP per person in Cayo is necessarily higher than in San Marcos, as it depends on their starting points. Additionally, we cannot conclude anything about the capital stock in either country.

Question 15

Suppose that an economy with constant returns to scale doubled its physical capital stock, doubled its available natural resources, and doubled its human capital, but kept the size of the labour force the same. How does the change in output compare to the change in productivity?

Accepted Answer

According to the Solow growth model, doubling the physical capital stock, natural resources, and human capital, while holding labor constant, would result in a proportional increase in output. This means that output would double. However, productivity would not double because productivity is defined as output per unit of input. Since only the inputs have doubled, and not the labor force, the increase in productivity would be less than double. Therefore, the correct answer is B.

Question 16

One of the ten principles of economics is that people face tradeoffs. The growth that arises from capital accumulation is not a free lunch. What is the opportunity cost of that capital accumulation?

Accepted Answer

The opportunity cost of capital accumulation is the present consumption of goods and services that has to be sacrificed in order to invest in the accumulation of capital for future consumption. Therefore, people need to consume less goods and services now in order to have more consumption in the future.

Question 17

Which of the following does Y/L refer to?

Accepted Answer

Y/L refers to productivity, which is the amount of output per unit of labor.

Question 18

If your firm has constant returns to scale, what would happen to your firm's output if you doubled all your inputs?

Accepted Answer

A firm with constant returns to scale means that doubling all inputs will result in an exact doubling of output. Therefore, the answer is C) It would double.

Question 19

If the production function for an economy had constant returns to scale, the labour force doubled, and all other inputs stayed the same, what would happen to real GDP?

Accepted Answer

The answer of If the production function for an economy...

Question 20

What would increase productivity, everything else being the same?

Accepted Answer

An increase in physical capital per worker, such as new machinery or technology, can lead to greater efficiency and productivity in the production process. It allows workers to produce more output with the same amount of effort and time. Immigration (A) may bring in new workers, but without additional resources, it does not necessarily lead to an increase in productivity. Increasing the number of hours of work per week (B) may lead to short-term gains, but it can quickly lead to burnout and decreased productivity. An increase in prices (C) can lead to an increase in revenue, but it does not necessarily mean an increase in productivity as it depends on the cause of the price increase.

Quiz 7: Production and Growth