Deck 4: A Model of Production

Question 1

The equation is called the ________ function.

A) Lucas expectations
B) Keynesian welfare
C) Friedman-Schwartz money
D) Cobb-Douglas production
E) Glass-Steagall utility

Answer 1

Cobb-Douglas production

Question 2

In the equation , the lack of a "bar" over the L means that it is:

A) an exogenous variable.
B) an endogenous variable.
C) a parameter.
D) constant.
E) equal to one.

Answer 2

an endogenous variable.

Question 3

The equation is an example of :

A) a growth model.
B) a utility function.
C) a consumption function.
D) the production possibilities frontier.
E) a production function.

Answer 3

a production function.

Question 4

Which of the following are we likely going to want to explain with an economic model?
i. Why people in the United States are 50 times richer than Ethiopians.
ii. What causes economic growth.
iii. What we think politicians should do with taxes.

A) i only
B) ii only
C) iii only
D) i and ii
E) All of these options are correct.

Question 5

The equation is an example of:

A) a consumption function.
B) a utility function.
C) a production function.
D) the production possibilities frontier.
E) a growth model.

Question 6

The production function describes:

A) how particular amounts of capital and labor can be combined to generate output.
B) how any amount of capital and labor can be combined to generate output.
C) how any amount of capital and a particular amount of labor can be combined to generate output.
D) how any amount of labor and a particular amount of capital can be combined to generate output.
E) what output would be in a so-called perfect economy.

Question 7

One of the key characteristics of the Cobb-Douglas production function is:

A) increasing returns to scale.
B) decreasing returns to scale.
C) constant returns to scale.
D) that it compacts all inputs into a single equation.
E) that it is an exact replication of a firm's production function.

Question 8

In the production function ,
Represents:

A) an unknown.
B) the amount of capital in an economy.
C) the amount of labor in an economy.
D) a productivity parameter.
E) an error term.

Question 9

In the equation , the "bar" over the A means that it is a:

A) parameter that is endogenous.
B) variable that is fixed but not exogenous.
C) parameter that is variable or exogenous.
D) variable that is endogenous.
E) parameter that is fixed and exogenous.

Question 10

The text uses this analogy of the economic model: "As the model-builder, ________ what actions the robots can take and ________ the raw materials that fill the robot world. After constructing the world, you switch on the power source and ________."

A) you determine; you provide; you know what happens
B) reality determines; reality provides; watch what happens
C) reality determines; reality provides; you know what happens
D) you determine; you provide; watch what happens
E) None of these answers is correct.

Question 11

Consider an economy where the only consumption good is ice cream. Firms in this economy must:

A) hire all workers and rent all machines available.
B) choose how many workers to hire and how many ice cream machines to rent.
C) choose how many workers to hire and rent all machines available.
D) hire all workers and choose how many machines to rent.
E) None of these answers is correct.

Question 12

Mathematically, an economic model is:

A) a fake world.
B) a spreadsheet.
C) an accurate representation of reality.
D) a set of equations.
E) the actual macroeconomy.

Question 13

The production function describes how ________ can be combined to generate output.

A) any amount of labor and a particular amount of capital
B) particular amounts of capital and labor
C) any amount of capital and labor
D) any amount of capital and a particular amount of labor
E) None of these answers is correct.

Question 14

The two main inputs we consider in a simple production function are:

A) land and labor.
B) capital and land.
C) capital and labor.
D) utilities and capital.
E) natural resources and labor.

Question 15

A model is a(n) ________ representation of ________ world that we use to study economic phenomena.

A) false; a toy
B) mathematical; a toy
C) accurate; the real
D) mathematical; the real
E) accurate; a toy

Question 16

Consider two economies. If each country has the same production function and the same amount of capital and labor, the country that ________ produces more.

A) is less productive
B) is more productive
C) has more natural resources
D) has lower costs of production
E) has more workers

Question 17

The production function describes how ________ can be combined to generate output.

A) any amount of capital and labor
B) particular amounts of capital and labor
C) any amount of capital and a particular amount of labor
D) any amount of labor and a particular amount of capital
E) None of these answers is correct.

Question 18

Consider two countries, labeled 1 and 2. Each has the production function , = 1, 2. If the only difference between the two countries is that A₁ $\gt$ A₂:

A) Country 2 will not produce anything, ceteris paribus.
B) Country 2 will produce more than Country 1, ceteris paribus.
C) Country 1 will produce more than Country 2, ceteris paribus.
D) each will produce the same amount, ceteris paribus.
E) Not enough information is given.

Question 19

Which of the following inputs do we generally consider in a simple production function?

A) capital
B) consumption
C) natural resources
D) utilities
E) distance

Question 20

In the equation , the "bars" over the A and K mean they are:

A) parameters that are endogenous.
B) variables that are fixed but not exogenous.
C) parameters that are endogenous
D) variables that are endogenous.
E) parameters that are fixed and exogenous.

Question 21

Which of the following production functions exhibits constant returns to scale?

A)
B)
C)
D)
E) All of these answers are correct.

Question 22

Which of the following production functions exhibits increasing returns to scale?

A)
B)
C)
D)
E) All of these answers are correct.

Question 23

Which of the following production functions exhibits constant returns to scale?

A)
B)
C)
D)
E) All of these answers are correct.

Question 24

The solution to the firm's maximization problem is how much:

A) capital and labor to hire, given the rental rate of capital and labor's wage rate.
B) capital and labor to hire, given the rental rate of capital only.
C) capital to hire, given the rental rate of capital.
D) capital and labor to hire, regardless of the rental rate of capital and labor's wage rate.
E) labor to hire, given labor's wage rate.

Question 25

A production function exhibits increasing returns to scale when you:

A) double one input-you double the output.
B) double each input-you double the output.
C) double each input-you less than double the output.
D) double each input-you more than double the output.
E) hold inputs constant-you double the output.

Question 26

A production function exhibits decreasing returns to scale when you:

A) double each input-you double the output.
B) double each input-you more than double the output.
C) double each input-you less than double the output.
D) double one input-you double the output.
E) hold inputs constant-you double the output.

Question 27

The marginal product of labor is defined as:

A) output divided by labor.
B) the additional output generated by hiring an additional unit of labor.
C) the additional output generated by hiring an additional unit of labor and capital.
D) the additional output generated by hiring an additional unit of capital.
E) the additional revenue generated by hiring an additional unit of labor.

Question 28

The law of diminishing marginal product to capital means that as we add additional units of capital:

A) and labor, output will increase, but at a constant rate.
B) and labor, output will increase, but at a decreasing rate.
C) but hold labor constant, output will increase, but at an increasing rate.
D) but hold labor constant, output will increase, but at a constant rate.
E) but hold labor constant, output will increase, but at a decreasing rate.

Question 29

A firm's profit is simply defined as:

A) zero.
B) revenues plus costs.
C) revenues minus costs.
D) the price of output minus labor costs.
E) the price of output minus labor costs minus capital costs.

Question 30

If the production function is given by and
And K = L = 8, total output equals:

A) Y = 2.
B) Y = 6.
C) Y = 14.
D) Y = 8.
E) None of these answers is correct.

Question 31

Refer to the following figure when answering the following questions.
Figure 4.1: Production Function

-Consider Figure 4.1. The shape of this production function suggests that $\alpha$ in the production function is:

A) equal to one.
B) greater than one.
C) equal to zero.
D) less than one.
E) Not enough information is given.

Question 32

A production function exhibits constant returns to scale when you:

A) hold inputs constant-you double the output.
B) double each input-you more than double the output.
C) double each input-you less than double the output.
D) double one input-you double the output.
E) double each input-you double the output.

Question 33

Refer to the following figure when answering the following questions.
Figure 4.1: Production Function
Consider Figure 4.1. The shape of this production function suggests:

A) not enough information is given.
B) a diminishing marginal product of labor.
C) a constant marginal product of capital.
D) an increasing marginal product of capital.
E) a diminishing marginal product of capital.

Question 34

If the production function is given by and K = 27 and L = 8, total output equals:

A) Y = 1.
B) Y = 18.
C) Y =12.
D) Y= 8.
E) None of these answers is correct.

Question 35

Refer to the following figure when answering the following questions.
Figure 4.2: The Production Function
Consider Figure 4.2. The shape of this production function suggests:

A) a constant marginal product of capital.
B) a diminishing marginal product of capital.
C) a diminishing marginal product of labor.
D) an increasing marginal product of capital.
E) Not enough information is given.

Question 36

If the production function is given by and K =81 and L =2.5, total output equals about:

A) Y =1.
B) Y = 0.3.
C) Y =22.1.
D) Y = 6.0.
E) Y = 82.4.

Question 37

Refer to the following figure when answering the following questions.
Figure 4.1: Production Function
Consider Figure 4.1. The shape of this production function suggests:

A) None of these answers is correct.
B) a diminishing marginal product of labor.
C) a constant marginal product of capital.
D) an increasing marginal product of capital.
E) an increasing marginal product of labor.

Question 38

Refer to the following figure when answering the following questions.
Figure 4.2: The Production Function
Consider Figure 4.2. The shape of this production function suggests:

A) a constant marginal product of capital.
B) a diminishing marginal product of capital.
C) a constant marginal product of labor.
D) an increasing marginal product of capital.
E) None of these answers is correct.

Question 39

The firm's profit maximization problem is:

A) max $\pi$ = F(r, w)- rK -wL
{r, w}.
B) max $\pi$ = rK + wL - F(K, L)
{K, L}.
C) max $\pi$ = F(K, L) - rK - wL
{r, w}.
D) max $\pi$ = F(K, L) - rK - wL
{K, L}.
E) All of these answers are correct.

Question 40

Figure 4.3: The Production Function
Consider Figure 4.3. The shape of this production function suggests:

A) a diminishing marginal product of capital.
B) a constant marginal product of capital.
C) a diminishing marginal product of labor.
D) an increasing marginal product of capital.
E) Not enough information is given.

Question 41

In the Cobb-Douglas production function , if a = 1/4, then:

A) capital's share of GDP is one-fourth.
B) labor's share of GDP is half.
C) capital's share of GDP is three-fourths.
D) labor's share of income is one-fourth.
E) capital's share of GDP is four.

Question 42

The equation MPK = r* yields the:

A) amount of capital in an economy.
B) optimal amount of capital, K*, a firm fires.
C) optimal amount of labor, L*, a firm hires.
D) quantity of capital a firm wants to hire at any rental rate of capital.
E) None of these answers is correct.

Question 43

Suppose the payments to capital and labor are (w*L*)/Y* = 2/3 and (r*K*)/Y*= 1/3, respectively. One implication of this result is that ________ and profits are ________.

A) ; positive
B) ; equal to zero
C) ; negative
D) ; equal to zero
E) ; negative

Question 44

Suppose the payments to capital and labor are (w*L*)/Y* = 2/3 and (r*K*)/Y*= 1/3, respectively. One implication of this result is:

A) .
B) .
C) .
D) .
E) .

Question 45

If and
, then output is determined by:

A) the total amount of labor in an economy.
B) the total amount of capital in an economy.
C) the total amount of capital and labor available in an economy.
D) a percentage of capital and labor in an economy.
E) Not enough information is given.

Question 46

The marginal product of the labor curve represents the:

A) demand for wages.
B) supply of labor.
C) demand for labor.
D) demand for capital.
E) supply of wages.

Question 47

Suppose the payments to capital and labor are (w*L*)/Y* = 2/3 and (r*K*)/Y* = 2/3, respectively. One implication of this result is:

A) .
B) .
C) .
D) .
E) .

Question 48

In the Cobb-Douglas production function , if a = 1/3, then:

A) labor's share of GDP is two-thirds.
B) labor's share of GDP is one-third.
C) capital's share of GDP is two-thirds.
D) capital's share of income is one.
E) labor's share of income is three.

Question 49

With a Cobb-Douglas production function , the marginal product of capital is ________ and the marginal product of labor is ________.

A) MPK = (1/3)(Y/K); MPL = (2/3)(Y/L)
B) MPK =(2/3)(Y/K); MPL = (1/3)(Y/L)
C) MPK=(2/3)(Y/K); MPL = (2/3)(Y/L)
D) MPK =0 (1/3)(Y/K); MPL = (1/3)(Y/L)
E) None of these answers is correct.

Question 50

If MPK $\gt$ r, the firm:

A) should hire more labor.
B) should hire more capital until MPK = 0.
C) should get rid of some capital until MPK = r.
D) should hire more capital until MPK = r.
E) has the optimal amount of capital.

Question 51

Figure 4.4: Labor Market
In Figure 4.4, MPL represents the labor ________, represents the labor ________, and the intersection of the two yields the ________.

A) supply; demand; equilibrium wage
B) demand; supply; equilibrium wage
C) supply; demand; equilibrium rental rate of capital
D) demand; supply; amount of capital hired
E) None of these answers is correct.

Question 52

Accounting profit is ________ and is equal to ________.

A) income paid to capital; r*K*
B) zero; the real interest rate
C) equal to two-thirds of national income; r*
D) the same as economic profit; zero
E) equal to one-third of the labor income; r*L*

Question 53

Figure 4.3: The Production Function

-The solution to the firm's profit maximization is:

A) MPL = w.
B) MPL = w and MPK = r.
C) MPL $\lt$ w and MPK =r.
D) MPL = w and MPK = 0.
E) MPL = w and MPK = r

Question 54

In the Cobb-Douglas production function the $\alpha$ represents:

A) total income.
B) the share of production contributed by labor.
C) the total amount of capital in an economy.
D) the total demand for capital in an economy.
E) the share of production contributed by capital.

Question 55

In models with perfect competition:

A) economic profits are always positive.
B) accounting profits are zero.
C) income paid to labor is the same as is paid to capital.
D) the real interest rate is equal to the nominal interest rate.
E) economic profits are zero.

Question 56

If MPL $\lt$ w, the firm:

A) has the optimal amount of labor.
B) should fire some labor until MPL = w.
C) should fire some labor until MPL = 0.
D) should hire more capital until MPK = 0.
E) should hire more capital until MPL = w.

Question 57

If MPK = r, the firm:

A) should hire more labor.
B) should hire more capital until MPK= w.
C) should hire more capital until MPK = 0.
D) should get rid of some capital until MPK = r.
E) has the optimal amount of capital.

Question 58

A firm's stock price is equal to:

A) current revenues divided by the number of stocks being traded.
B) the present value of all past earnings.
C) zero, in the long run.
D) current and expected future accounting profits.
E) economic plus accounting profits, times the real interest rate.

Question 59

In the Cobb-Douglas production function , labor's share of GDP is:

A) two-thirds, regardless of how much labor there is.
B) two-thirds, but can change as more laborers are added.
C) one-third, regardless of how much labor there is.
D) always equal to one.
E) Not enough information is given.

Question 60

The marginal product of labor is measured in:

A) dollars.
B) units of output.
C) units of output per dollar.
D) units of capital per dollar.
E) units of labor per dollar.

Question 61

The equation has what two important implications?

A) Output per person tends to be higher when (1) the productivity parameter is higher and (2) the amount of capital per person is higher.
B) Output per person tends to be lower when (1) the productivity parameter is higher and (2) the amount of capital per person is higher.
C) Output per person tends to be higher when (1) the productivity parameter is lower and (2) the amount of capital per person is higher.
D) Output per person tends to be higher when (1) the productivity parameter is higher and (2) the amount of capital per person is lower.
E) The population tends to be higher when (1) the productivity parameter is higher and (2) the amount of capital per person is higher.

Question 62

As an economist working at the International Monetary Fund, you are given the following data for Burundi: predicted per capita GDP, relative to the United States, as given by , is 0.10, and total factor productivity is 0.083. What is the observed per capita GDP, relative to the United States?

A) 0.008
B) 0.016
C) 0.87
D) 0.44
E) 0.62

Question 63

Refer to the following table when answering the following questions.
Table 4.1: Production Model's Prediction for Per Capita GDP (US = 1) (Source: Penn World Tables 9.0)
One explanation for the difference between the predicted output per person and the observed per capita GDP in Table 4.1 is differences in:

A) the labor supply.
B) the state of technology.
C) per capita capital.
D) capital's share of GDP.
E) labor's share of GDP.

Question 64

As a measure for total factor productivity, we can use the quantity of ________ in an economy.

A) computers
B) factories
C) machines
D) kilowatt hours used
E) None of these answers is correct.

Question 65

In the Cobb-Douglas production function , defining y = Y/L as output per person and
K=K/L as capital per person, the per person production function is:

A)
B)
C)
D)
E) None of these answers is correct.

Question 66

Refer to the following table when answering the following questions.
Table 4.1: Production Model's Prediction for Per Capita GDP (US = 1) (Source: Penn World Tables 9.0)
Considering the data in Table 4.1, the explanation for the difference between the predicted and actual level of output is called ________. If you compare South Africa's observed and predicted output, this difference is equal to ________.

A) total factor productivity; 0.37
B) the Solow residual; 2.71
C) Dirac's delta; 0.14
D) capital's share of GDP; one-third
E) labor's share of GDP; two-thirds

Question 67

As an economist working at the International Monetary Fund, you are given the following data for Japan: observed per capita GDP, relative to the United States, is 0.760; predicted per capita GDP, given by , is 1.06. What is total factor productivity?

A) 0.75
B) 1.05
C) 1.39
D) 0.81
E) 0.72

Question 68

Differences in output across economies with the same per capita capital stock can be explained by:

A) differences in labor.
B) differences in total factor productivity.
C) similarities in total factor productivity.
D) differences in resource use.
E) similarities in physical capital.

Question 69

Refer to the following table when answering the following questions.
Table 4.1: Production Model's Prediction for Per Capita GDP (US = 1) (Source: Penn World Tables 9.0)
Considering the data in Table 4.1, the explanation for the difference between the predicted and actual level of output is called ________. If you compare India's observed and predicted output, this difference is equal to ________.

A) labor's share of GDP; two-thirds
B) the Solow residual; 4.5
C) liquidity; 0.05
D) capital's share of GDP; one-third
E) total factor productivity; 0.22

Question 70

In the equation ,
Represents:

A) total factor productivity.
B) physical capital.
C) natural resources.
D) the capital = labor ratio.
E) the real interest rate.

Question 71

Refer to the following table when answering the following questions.
Table 4.1: Production Model's Prediction for Per Capita GDP (US = 1) (Source: Penn World Tables 9.0)
One explanation for the difference between the predicted output per person and the observed per capita GDP in Table 4.1 is differences in:

A) the labor supply.
B) human capital.
C) per capita capital.
D) capital's share of GDP.
E) None of these answers is correct.

Question 72

As an economist working at the International Monetary Fund, you are given the following data for Burundi: observed per capita GDP, relative to the United States, is 0.01; predicted per capita GDP, given by , is 0.18. What is total factor productivity?

A) 0.44
B) 0.98
C) 0.06
D) 0.00
E) 18.00

Question 73

Refer to the following table when answering the following questions.
Table 4.1: Production Model's Prediction for Per Capita GDP (US = 1) (Source: Penn World Tables 9.0)
Consider Table 4.1, which compares the model to actual statistical data on per capita GDP. You observe the model:

A) consistently underestimates the level of per capita GDP.
B) consistently overestimates the level of per capita GDP.
C) does a really good job of estimating the level of per capita GDP.
D) clearly contains all factors that affect per capita GDP.
E) None of these answers is correct.

Question 74

In the Cobb-Douglas production function , defining y = Y/L as output per person and
K = K/L as capital per person, the per person production function is:

A)
B)
C)
D)
E) None of these answers is correct.

Question 75

You are an economist working for the International Monetary Fund. Your boss wants to know what the total factor productivity of India is, but all you have is data on per capita GDP, y, and the per capita capital stock, k. If you assume that capital's share of GDP is one-fourth, what would you use to find total factor productivity?

A)
B)
C)
D)
E) None of these answers is correct.

Question 76

In the Cobb-Douglas production function , defining y = Y/L as output per person and
K = K/L as capital per person, the per person production function is:

A)
B)
C)
D)
E) None of these answers is correct.

Question 77

In the equation , 1/3 represents:

A) total factor productivity.
B) physical capital.
C) natural resources.
D) the output share of capital.
E) the real interest rate.

Question 78

Refer to the following table when answering the following questions.
Table 4.1: Production Model's Prediction for Per Capita GDP (US = 1) (Source: Penn World Tables 9.0)
One explanation for the difference between the predicted output per person and the observed per capita GDP in Table 4.1 is differences in:

A) per capita capital.
B) the labor supply.
C) factor productivity.
D) labor's share of GDP.
E) None of these answers is correct.

Question 79

You are an economist working for the International Monetary Fund. Your boss wants to know what the total factor productivity of China is, but all you have is data on per capita GDP, y, and the per capita capital stock, k. If you assume that capital's share of GDP is one-third, what would you use to find total factor productivity?

A)
B)
C)
D)
E) None of these answers is correct.

Question 80

As an economist working at the International Monetary Fund, you are given the following data for Italy: observed per capita GDP, relative to the United States, is 0.69; predicted per capita GDP, given by , is 0.98. What is total factor productivity?

A) 0.75
B) 0.68
C) 0.99
D) 0.81
E) 0.70