Chapter 3 Mishkin

Macreconomics: Policy and Practice (Mishkin)
Chapter 3 Aggregate Production and Productivity

3.1 Determinants of Aggregate Production
1) Which of the following constitutes an input to the Cobb-Douglas production function?
A) capital
) labor
C) total factor producti!it"
D) all of the abo!e
#) none of the abo!e
Answer$ D
%opic$ 3.1 Determinants of Aggregate Production
&) %o anal"'e aggregate producti!it"( economists t"picall" assume )))))))).
A) that the hours each person wor*s !aries with the wage rate
) that all of the capital and labor in the econom" are full" utili'ed
C) that output can increase onl" if inputs ha!e become more producti!e
D) all of the abo!e
Answer$
AAC+$ ,eflecti!e %hin*ing
3) %he output an econom" can produce with one unit of capital and one unit of labor is
)))))))).
A) indicated b" the A !ariable in the Cobb-Douglas production function
) commonl" referred to as labor producti!it"
C) a !ariable that depends on how man" units of capital and labor are a!ailable
D) all of the abo!e
Answer$ A
-) What does the Cobb-Douglas production function assume about the input shares in the
econom"?
A) the capital share is larger than the labor share of income
) both the capital and labor shares of income grow o!er time
C) both the capital and labor shares of income remain relati!el" constant o!er time
D) the capital share of income is e.ual to the labor share of income
Answer$ C
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Copyright 2012 Pearson Education, Inc.
/) What does the Cobb-Douglas production function assume about the input shares in the
econom"?
A) the capital share is smaller than the labor share of income
) both the capital and labor shares of income are positi!e
C) both the capital and labor shares of income remain relati!el" constant o!er time
D) all of the abo!e
Answer$ D
0) Which of the following is true about labor producti!it"?
A) it is the amount of total factor producti!it" 1%2P) per unit of labor
) it is more difficult to measure than %2P
C) it is a more general and better measure of producti!it" than %2P
D) all of the abo!e
Answer$ #
3) Which of the following is true about labor producti!it"?
A) it is the amount of output produced per unit of labor
) it is easier to measure than total factor producti!it" 1%2P)
C) it is more commonl" mentioned in the media than total factor producti!it" 1%2P)
D) all of the abo!e
Answer$ D
4) Which of the following is true about total factor producti!it" 1%2P)?
A) it tells us how producti!e capital and labor are
) it is a more general and better measure of producti!it" than labor producti!it"
C) it is not directl" measurable
D) all of the abo!e
Answer$ D
AAC+$ Anal"tical +*ills
2
5) Which of the following is true about total factor producti!it" 1%2P)?
A) it can be measured 6ust li*e capital and labor
) it cannot be directl" measured so it has to be calculated from gi!en !alues of capital( labor
and output
C) while it cannot be measured directl"( it has an e7ponent of 8.3 in the Cobb-Douglas
production function
D) while it cannot be measured directl"( it has an e7ponent of 8.3 in the Cobb-Douglas
production function
Answer$
18) +uppose than an econom" has output 9 : A;
8.3
<
8.3
( that 9 e.uals =1& trillion( capital ; is
=&3 trillion( and labor < is 0- million wor*ers. >i!en this information( what is the closest
appro7imation of total factor producti!it" A?
A) less than 8.81
) around 8.&/
C) roughl" 8.33
D) close to 8.-
#) e7actl" 1--
Answer$
11) +uppose than an econom" has output 9 : A;
8.3
<
8.3(
that 9 e.uals =15 trillion( capital ; is
=&3 trillion( and labor < is 1&/ million wor*ers. >i!en this information( what is the closest
A) less than 8.81
) around 8.&/
C) roughl" 8.33
D) close to 8.-
#) e7actl" 1--
Answer$
3
1&) +uppose than an econom" has output 9 : A;
8.3
<
8.3
( that 9 e.uals =-& trillion( capital ; is
=0- trillion( and labor < is 1&/ million wor*ers. >i!en this information( what is the closest
A) less than 8.81
) around 8.&/
C) roughl" 8.33
D) close to 8.-
#) e7actl" 1--
Answer$ D
13) >i!en the production function 9 : A;
8.3
<
8.3
( if an econom"?s capital per wor*er k is =&3
thousand( and its total factor producti!it" A is 8./( then output per wor*er is 1appro7imatel")
)))))))).
A) =13(/88
) =-8(/88
C) =3(888
D) =/(888
#) =1(/88
Answer$ #
1-) Which of the following is true about per capita income?
A) it is an appro7imate measure of how rich or poor a countr" is
) it is the same as income per wor*er onl" if e!er"one in the econom" is assumed to wor*
C) it is the product of %2P and capital per wor*er onl" if e!er"one in the econom" is assumed to
wor*
D) all of the abo!e
Answer$ D
1/) 2rom the Cobb-Douglas production function we learn that there are two sources that help
e7plain cross-countr" differences in per capita income$)))))))) and )))))))).
A) capital@ labor producti!it"
) labor share of income@ %2P
C) %2P@ capital per person
D) labor per person@ capital
Answer$ C
4
10) Af countr" B has a higher capital per person than countr" 9( then )))))))).
A) countr" B is richer than countr" 9
) the onl" wa" for countr" B to be richer than countr" 9 is if B is 6ust as producti!e 1has the
same %2P) as 9
C) the onl" wa" for countr" 9 to be richer than countr" B is if 9 is more producti!e 1has a higher
%2P) than B
D) the onl" wa" for countr" B to be richer than countr" 9 is if B is less producti!e 1has a lower
%2P) than 9
Answer$ C
13) %he main cause of low per capita income is )))))))).
A) a low le!el of capital
) a small wor*force
C) low producti!it" of capital and labor
D) slow growth of capital and labor shares of income
Answer$ C
14) What do "ou thin* would be the Cobb-Douglas single best prescription for poor countries to
catch up with the rich?
A) to increase their stoc* of capital
) to increase their labor force
C) to find more efficient wa"s to allocate and use capital and labor
D) to as* help of the rich countries
Answer$ C
15) Capital per person k is higher in Capan than in the Dnited +tates. As a result )))))))).
A) per capita income is higher in Capan
) total factor producti!it" is higher in Capan
C) the marginal product of capital is higher in Capan
D) all of the abo!e
Answer$ #
5
&8) A ten percent increase in total factor producti!it" A will increase )))))))).
A) the marginal product of capital 1EP;) b" ten percent
) the marginal product of labor 1EP<) b" ten percent
C) output b" ten percent
D) all of the abo!e
Answer$ C
&1) Constant returns to scale 1C,+) implies that )))))))).
A) increasing all the factor inputs b" the same percentage lead to the same percentage increase in
output
) increasing all the factor inputs b" the same percentage lead to a higher percentage increase in
output
C) increasing all the factor inputs b" the same percentage lead to a lower percentage increase in
output
D) increasing all the factor inputs b" the same percentage lea!es output unchanged
Answer$ A
&&) Constant returns to scale 1C,+) implies that when the firm )))))))).
A) doubles all inputs( output more than doubles
) doubles all inputs( output doubles
C) doubles all inputs( output increases b" less than 188 percent
D) doubles all inputs( output remains constant
Answer$
&3) Dsing the Cobb-Douglas production function( while holding other inputs constant( if the
amount of a specific factor is increasing )))))))).
A) the increased amount of output from an e7tra unit of input declines
) the increased amount of output from an e7tra unit of input increases
C) that factor?s share of output is declining
D) that factor?s share of output is increasing
Answer$ A
6
&-) Diminishing marginal product means that )))))))).
A) when adding e7tra units of a single input( output increases become smaller
) when adding e7tra units of a single input( output increases become larger
C) when adding e7tra units of a single input( output declines
D) the amount of output increases when we add more inputs
Answer$ A
&/) %he marginal product of capital 1EP;) measures )))))))).
A) b" how much output increases for each additional unit of capital
) b" how much capital increases for each additional unit of output
C) b" how much capital increases for each additional unit of labor
D) b" how much total factor producti!it" increases for each additional unit of capital
Answer$ A
&0) Which of the following will cause an increase in the marginal product of capital 1EP;)?
A) a decrease in the .uantit" of labor in use
) an increase in labor producti!it"
C) a decrease in the .uantit" of capital in use
D) all of the abo!e
Answer$ C
&3) As the capital stoc* increases()))))))). %his means that the marginal product of capital
1EP;))))))))).
A) the slope of the production function falls@ declines
) the slope of the production function increases@ goes up
C) the slope of the production function falls@ goes up
D) the slope of the production function increases@ declines
Answer$ A
7
&4) %he marginal product of capital 1EP;) is gi!en b" the )))))))).
A) capital share of income F a!erage output per unit of capital
) capital share of income - a!erage output per unit of capital
C) capital share of income G a!erage output per unit of capital
D) capital share of income H a!erage output per unit of capital
Answer$ D
&5) %he marginal product of capital 1EP;) can be calculated from the following )))))))).
A) the capital share of income and the a!erage output per unit of capital
) the capital share of income and a!erage capital per wor*er
C) output and capital
D) the capital share of income and output
Answer$ A
38) What do we learn from the shape of the Cobb-Douglas production function?
A) its slope falls as capital gets added
) the marginal product of capital declines as the capital stoc* increases
C) there are diminishing returns to capital
D) all of the abo!e
Answer$ D
31) %he marginal product of labor 1EP<) measures )))))))).
A) b" how much labor increases for each additional unit of output
) b" how much labor increases for each additional unit of capital
C) b" how much total factor producti!it" increases for each additional unit of labor
D) b" how much labor increases for each additional unit of producti!it"
#) b" how much output increases for each additional unit of labor
Answer$ #

3&) As the amount of labor input increases )))))))). %his means that the marginal product of
labor 1EP<))))))))).
A) the slope of the production function increases@ goes up
) the slope of the production function falls@ declines
C) the slope of the production function falls@ goes up
D) the slope of the production function increases@ declines
Answer$
33) What do we learn from the shape of the Cobb-Douglas production function?
A) its slope remains constant as labor input increases
) the marginal product of labor declines as the labor input falls
C) there are diminishing returns to labor
D) all of the abo!e
Answer$ C
3-) %he marginal product of labor 1EP<) is gi!en b" the )))))))).
A) labor share of income F a!erage output per unit of labor
) labor share of income - a!erage output per unit of labor
C) labor share of income G a!erage output per unit of labor
D) labor share of income H a!erage output per unit of labor
Answer$ D
3/) %he marginal product of labor 1EP<) can be calculated from the following )))))))).
A) the labor share of income and the a!erage output per unit of labor
) the labor share of income and a!erage labor per wor*er
C) output and labor
D) the labor share of income and output
Answer$ A
!
30) Constant returns to scale 1C,+) implies )))))))).
A) constant returns to labor
) constant returns to capital
C) increasing marginal products
D) !ariable total factor producti!it"
#) diminishing marginal products
Answer$ #
33) An e7ample of a suppl" shoc* could be )))))))).
A) a technological inno!ation
) a natural disaster
C) an oil price increase
D) all of the abo!e
Answer$ D
34) A technolog" shoc* could ha!e a different impact than a natural catastrophe because
)))))))).
A) the former would li*el" lower %2P and the latter raise labor producti!it"
) the former would li*el" lower output and the latter raise production
C) the former would li*el" raise output and the latter would raise %2P
D) the former would li*el" lower labor producti!it" and the latter would lower %2P
#) the former would li*el" raise %2P and the latter would curtail production
Answer$ #
35) +ince the 1548s( China?s output per person has increased tremendousl". Which of these
possible contributors to economic growth in China is a good e7ample of a positi!e suppl" shoc*?
A) high le!els of sa!ing and in!estment
) declining rate of population growth
C) rising consumption of energ"
D) all of the abo!e
Answer$ #
10
-8) Which of the following is an e7ample of an ad!erse suppl" shoc*?
A) IP#C cuts oil production
) a large oil spill in the >ulf of Ee7ico
C) a de!astating hurricane off the <ouisiana coast
D) all of the abo!e
Answer$ D
-1) +uppose that labor producti!it" in one econom" is higher than it is in some other econom".
Does that mean that the first econom" is using its producti!e resources better than the second
econom"? #7plain.
Answer$ Jigher labor producti!it" does not necessaril" mean better use of resources. %he
econom" ma" ha!e more capital per wor*er( but the producti!it" of capital ma" be higher in the
second econom". %o compare use of resources across economies or o!er time( the correct
measure is total factor producti!it".
-&) Dse the Cobb-Douglas production function to e7plain wh" e!en massi!e mo!ements of labor
and capital across national borders ma" ha!e little impact on differences in per capita income.
Answer$ ,elati!el" low per capita income ma" be due to low total factor producti!it" or to low
capital per wor*er. An the latter case( migration of capital or of labor could reduce ine.ualit". An
the former case( howe!er( rising le!els of capital in a low-income econom" will do little to raise
output per person. Declines in the labor input due to out-migration from a low-income econom"
might mean more capital for each of the remaining wor*ers but( again( the increase in output per
wor*er will be small if total factor producti!it" is low.
-3) Capital per person in Andia is about fi!e percent and per capita income is about nine percent
of the D.+. le!el. >i!en that per capita income " : A*
8.3
( calculate the le!el of total factor
producti!it" 1A) ( relati!e to the D.+. le!el( that would be needed for Andia to match the D.+.
le!el of per capita income. 18.8/
8.3
: 8.-)
Answer$ 1 : A H 8.- implies A : &./
11
--) Dse the Cobb-Douglas production function to show that a one-unit increase in the labor input
will reduce the marginal product of labor and increase the marginal product of capital. #7plain
each of these results.
Answer$ EP< :
<
9 3 . 8
:
<
8.3
<
8.3
A; 3 . 8
:
8.3
<
8.3
8.3A;
. %his ratio will decline when < rises.
EP; :
;
9 3 . 8
:
;
8.3
<
8.3
A; 3 . 8
:
8.3
;
8.3
A< 3 . 8
. %his ratio increases with <. Adding more
labor input causes the capital input to be spread more thinl" 1each unit of labor has less capital to
wor* with)( so output increases at a diminishing rate. Eore labor input means( also( that the
a!ailable capital is being used more intensi!el" 1each unit of capital has more labor to wor* it)(
so the change in output that would result from a change in the .uantit" of capital is becoming
larger.
-/) +uppose an econom" has an increase in labor input of 08 percent( while output has increased
b" 188 percent. Assuming no change in total factor producti!it"( calculate the percentage
increase in the capital input. 1Dse the Cobb-Douglas production function 9 : A;
8.3
<
8.3
.)
Answer$ &9 : A1x;)
8.3
11.0<)
8.3
. Di!iding this b" the original production function "ields & : x
8.3
1.0
8.3
. +ol!e for x : 3.33. %he capital input has increased b" &33 percent.
3.& Determination of 2actor Prices
1) %he classical framewor* is based on what assumption1s)$)))))))).
A) man" firms in the econom"
) no single firm can control prices
C) in the long-run the .uantit" of factors supplied must be e.ual to the .uantit" of factors
demanded
D) all of the abo!e
Answer$ D
%opic$ 3.& Determination of 2actor Prices
&) An an en!ironment characteri'ed b" perfect competition we e7pect that )))))))).
A) there are !er" few firms in the econom"
) there are man" firms in the econom" but a !er" few ha!e the lion?s share of the industr"
C) the are man" small firms in the econom" and e!er" single firm is a price ta*er.
D) the go!ernment sets prices for all firms
Answer$ C
12
3) ;e" determinants of economic profit include )))))))).
A) the re!enue from selling goods and ser!ices
) the cost incurred in bu"ing capital
C) the cost of hiring labor
D) all of the abo!e
Answer$ D
-) ;e" influences on the !aluation of economic profits include )))))))).
A) the a!erage le!el of the prices of goods and ser!ices sold
) the rental price of capital
C) the wage rate
D) all of the abo!e
Answer$ D
/) #conomic profits differ from accounting profits because )))))))).
A) the former is calculated b" economists and the latter b" accountants
) man" firms own their own capital so accounting profits do not factor this cost
C) most firms report economic profits once a "ear and accounting profits e!er" pa" period
D) all of the abo!e
Answer$
0) Profit ma7imi'ation implies that firms will want to )))))))).
A) accumulate capital while the EP; is greater than the real wage
) accumulate capital while the EP; is greater than the rental price of capital
C) accumulate labor while the EP; is greater than the rental price of capital
D) accumulate labor while the EP; is greater than the real wage
Answer$
A) accumulate labor while the EP< is greater than the real wage
) accumulate capital while the EP; is lower than the rental price of capital
C) accumulate labor while the EP; is greater than the rental price of capital
D) accumulate capital while the EP< is greater than the real wage
Answer$ A
13
A) accumulate labor while the EP< is greater than the real wage
) accumulate capital while the EP; is greater than the rental price of capital
C) not accumulate either input without limit( because of diminishing returns to each factor
D) all of the abo!e
Answer$ D
5) 2irms will continue to increase their purchase of factor inputs as long as )))))))).
A) the marginal product of a gi!en factor is greater than its real factor price
) the marginal cost of a gi!en factor is lower than its marginal product
C) their total re!enues are greater than their total costs
D) all of the abo!e
Answer$ D
18) As firms use more and more of an input( )))))))).
A) the marginal product of other inputs tends to increase
) the marginal product of the input declines
C) the price of the input ma" increase
D) all of the abo!e
Answer$ D
11) Which of the following is 1are) li*el" to cause the marginal product of an input to decrease?
A) an increase in the real price of the input
) a decrease in the .uantit" of the input used in production
C) technological ad!ances
D) all of the abo!e
Answer$ #
14
1&) Which of the following is 1are) li*el" to cause the marginal product of an input to decrease?
A) an increase in the real price of the input
) a decrease in the .uantit" of other inputs used in production
C) technological ad!ances
D) all of the abo!e
Answer$
13) When a particular firm is full" utili'ing its capital( its output is gi!en b" 9 : 18 H <
8./
. %he
cost of labor is =1 per unit. %o ma7imi'e profit( how man" units of labor should this firm use?
A) &/
) /
C) 3.10
D) 188
#) /8
Answer$ A
1-) An an econom" with production function 9 : 1./ H ;
8.3
<
8.3
( ; : 3-3( and < : /1&. Af factor
mar*ets are in e.uilibrium( then the rental price of capital is 1appro7imatel") ))))))))( and the
real wage is 1appro7imatel") )))))))).
A) 8./@ 8.4
) 3@ 4
C) 8.5@ 1.3/
D) 1.-@ 8.-
#) 8.0@ 8.5
Answer$ #
1/) Af the .uantities of labor and capital in an econom" each increase b" the same x percent(
which of the following will increase b" x percent?
A) marginal product of capital
) economic profits
C) share of capital income in national income
D) rental price of capital
Answer$ #
15
10) Assume that an econom" is in e.uilibrium when the arri!al of immigrants causes an increase
in the suppl" of labor. Ince the econom" has ad6usted to its new e.uilibrium( and assuming that
the suppl" of capital remains unchanged( which of the following has decreased?
A) the share of capital income in national income
) the share of labor income in national income
C) national income
D) the rental price of capital
Answer$ #
13) Assume that an econom" is in e.uilibrium when technological progress causes an increase in
total factor producti!it". Ince the econom" has ad6usted to its new e.uilibrium( and assuming
that the supplies of capital and labor remain unchanged( which of the following has increased?
A) the real wage
) the share of capital income in national income
C) the share of labor income in national income
D) all of the abo!e
Answer$ A
14) Assume that an econom" is in e.uilibrium when there occurs an increase in the suppl" of
capital. %he a!ailable .uantit" of labor remains fi7ed. Ince the econom" has ad6usted to its new
e.uilibrium( which of the following has increased?
A) the real wage
) the rental price of capital
C) the share of capital income in national income
D) all of the abo!e
Answer$ A
15) %o get the first order conditions in a profit ma7imi'ation problem( we must )))))))).
A) set the profit function e.ual to 'ero and sol!e for the production function
) set the partial deri!ati!es of the production function e.ual to 'ero and sol!e for the price
C) set the partial deri!ati!e of the profit function e.ual to 'ero and sol!e for the marginal
products
D) set the production function e.ual to 'ero and sol!e for the marginal products
Answer$ C
16
&8) %he marginal product of capital indicates )))))))). %herefore the EP; cur!e is also
)))))))).
A) the .uantit" of capital supplied for a gi!en rental price@ the e.uilibrium price of capital
) the .uantit" of capital demanded for a gi!en rental price@ the demand cur!e of capital
C) the .uantit" of capital demanded for a gi!en rental price@ the e.uilibrium price of capital
D) the .uantit" of capital supplied for a gi!en rental price@ the suppl" cur!e of capital
Answer$
&1) %he marginal product of labor indicates )))))))). %herefore the EP< cur!e is also
)))))))).
A) the .uantit" of labor supplied for a gi!en wage@ the e.uilibrium price of labor
) the .uantit" of labor demanded for a gi!en wage@ the e.uilibrium price of labor
C) the .uantit" of labor demanded for a gi!en wage@ the demand cur!e of labor
D) the .uantit" of labor supplied for a gi!en wage@ the suppl" cur!e of labor
Answer$ C
&&) When the rental price of capital is abo!e the e.uilibrium price )))))))).
A) we ha!e an e7cess suppl" of capital and the rental price should fall
) we ha!e an e7cess demand of capital and the rental price should fall
C) we ha!e an e7cess suppl" of capital and the rental price should increase
D) we ha!e an e7cess demand of capital and the rental price should increase
Answer$ A
&3) When the real wage is below the e.uilibrium price in the labor mar*et )))))))).
A) we ha!e an e7cess suppl" of labor and the real wage should fall
) we ha!e an e7cess demand of labor and the real wage should fall
C) we ha!e an e7cess demand of labor and the real wage should increase
D) we ha!e an e7cess suppl" of labor and the real wage should increase
Answer$ C
17
&-) ,eal capital income is gi!en b" )))))))).
A) EP; H ;
) capital share of income H output per unit of capital H capital
C) capital share of income H output
D) all of the abo!e
Answer$ D
&/) ,eal labor income is gi!en b" )))))))).
A) EP< H <
) labor share of income H labor producti!it" H labor
C) labor share of income H output
D) all of the abo!e
Answer$ D
&0) A decrease in the growth rate of labor producti!it" is li*el" to cause a decrease in )))))))).
A) the growth rate of the real wage
) the growth rate of the marginal product of capital
C) the growth rate of the labor suppl"
D) the share of labor income in national income
Answer$ A
&3) An econom"?s total labor income is =& trillion( and total capital income is =1 trillion. An the
Cobb-Douglas production function( the e7ponent on capital is )))))))).
A) two thirds
) one half
C) one third
D) 8.3
Answer$ C
1
&4) %he three oil shoc*s the D.+. e7perienced in 1533-153-( 1535-1548 and &883-&884 had a
consistent result )))))))).
A) a decline in real wages due to an upward shift of the production function
) an increase in the rental price of capital along with a health" stoc* mar*et response
C) a decline in real wages due to a downward shift of the EP< cur!e
D) an increase in the rental price of capital due to an upward shift of the production function
Answer$ C
&5) An econom"?s production function is 9 : A;
8.3
<
8.3
( and the econom"?s total output in
e.uilibrium is =58 billion. %otal capital income in this econom" is )))))))).
A) =&3 billion
) =38 billion
C) =&1 billion
D) =38 billion
Answer$ A
38) An econom"?s production function is 9 : A;
8.3
<
8.3
e.uilibrium is =388 billion. %otal labor income in this econom" is )))))))).
A) =388 billion
) =&33.3 billion
C) =&18 billion
D) =-88 billion
Answer$ #
31) An econom"?s production function is 9 : A;
8.&/
<
8.3/
e.uilibrium is =488 billion. %otal capital income in this econom" is )))))))).
A) =&88 billion
) =&/ billion
C) =3/8 billion
D) =&03 billion
Answer$ A
1!
3&) #.uilibrium mar*et prices for capital and labor are =18 and =4( respecti!el". %hen( the
econom" e7periences one or more suppl" shoc*s( so that the marginal product of capital is =1&(
and the marginal product of labor is =5. Assuming that the a!ailable .uantities of capital and
labor are fi7ed( which of the following is 1are) li*el" to decrease as the econom" approaches its
new e.uilibrium?
A) real rental price of capital
) total output
C) economic profits
D) the .uantit" of capital in use
Answer$ C
33) #.uilibrium mar*et prices for capital and labor are =18 and =4( respecti!el". %hen( the
econom" e7periences one or more suppl" shoc*s( so that the marginal product of capital is =5(
and the marginal product of labor is =0. Assuming that the a!ailable .uantities of capital and
labor are fi7ed( which of the following is 1are) li*el" to decrease as the econom" approaches its
new e.uilibrium?
A) economic profits
) real rental price of capital
C) total output
D) the .uantit" of capital in use
Answer$
3-) %he three oil shoc*s the D.+. e7perienced in 1533-153-( 1535-1548 and &883-&884 had a
consistent result )))))))).
A) a decline in the EP;
) a decline in the real rental price of capital
C) a decline in stoc* prices
D) all of the abo!e
Answer$ D
20
3/) As an in!estor( negati!e suppl" shoc*s are not attracti!e because )))))))).
A) the" tend to lead to lower producti!it"
) the real rental price of capital tends to decline dri!ing rental incomes down
C) with decreases in e7pected income( claims on those incomes also tend to fall leading to stoc*
mar*et downturns
D) all of the abo!e
Answer$ D
30) +uppose a go!ernment tried to mandate a real wage abo!e the e.uilibrium real wage.
Assuming that factor mar*ets are otherwise free and competiti!e( e7plain wh" the higher real
wage would fail to increase the share of labor income in national income.
Answer$ >i!en the Cobb-Douglas production function( the marginal product of labor is
<
9 3 . 8
(
and the marginal product of capital is
;
9 3 . 8
. Af each factor?s price is e.ual to its marginal
product( then its share of total income e.uals its e7ponent in the production function@ 8.3 for
labor( and 8.3 for capital. 2irms will respond to the mandated higher real wage b" reducing the
.uantit" of labor demanded until the marginal product of labor is e.ual to the real wage. Wor*ers
who still ha!e a 6ob will ha!e higher income( but man" wor*ers now ha!e no 6ob and no income.
%he reduced labor input lowers the marginal product of capital. +ince the rental price of capital is
unregulated( it will fall( so that no capital becomes idle. +ince the prices of both labor and capital
are e.ual to their respecti!e marginal products( their shares of the reduced total output are
unchanged.
33) >i!en the production function 9 : A;K<1
-K
( if the rental price of capital is 8.133( 9 : 058(
and ; : 1(3&4( what is the !alue of the e7ponent K? Af A : 1( and the real wage is 1.1/( is this
econom" in a long-run e.uilibrium?
Answer$ +ince the rental price of capital e.uals the marginal product of capital( we ha!e 8.133 :
13&4
K058
( so K : one-third. Af A : 1( we ha!e 058 : 1& H <
&L3
( so < : -30. %hen the real wage is
-30
1&L3)058
: 1.80 M 1.1/. %his is not a long-run e.uilibrium. #.ui!alentl"( if the e.uilibrium real
wage is 1.1/( < must satisf" 1.1/ :
<
1&L3)058
( so < : -88. %hen 9 : 1& H -88
&L3
: 0/1.3 M 058.
%his is not a long-run e.uilibrium. 1Af the real wage remains 1.1/( the .uantit" demanded of
labor will fall to -88. %hen( the e7cess suppl" of labor will force the real wage to decline to the
mar*et e.uilibrium !alue of 1.80.)
21
34) +uppose that reduced barriers to international financial transactions cause an increase in the
econom"?s suppl" of capital. #7plain( step-b"-step( how the econom" ad6usts to arri!e at a new
long-run e.uilibrium.
Answer$ %he increase in the suppl" of capital 1rightward shift of the suppl" cur!e) causes an
e7cess suppl" at the original rental price( and the e7cess suppl" causes the price to fall. +ince the
price of capital falls below its marginal product( firms bu" more capital. %he increase in capital
utili'ation causes an increase in the marginal product of labor( so the demand for labor increases
1the demand cur!e for labor shifts up). +ince the suppl" of labor is fi7ed( there is no change in
the .uantit" of labor in use( but the real wage rises to e.ual the higher marginal product. %he
rental price of capital stops falling when the .uantit" of capital in use is e.ual to the suppl" of
capital. %he increase in output is distributed between the capital and labor inputs( so that the
share of each factor in total income is unchanged from the original e.uilibrium. %he 1unchanged)
labor inputs recei!e a higher wage@ each unit of capital recei!es a reduced pa"ment( but capital?s
share of total income is increased because of the larger number of capital units recei!ing
pa"ment.
35) +uppose that a technological ad!ance raises total factor producti!it". #7plain( step-b"-step(
how the econom" ad6usts to arri!e at a new long-run e.uilibrium.
Answer$ %he marginal products of both labor and capital increase( so both demand cur!es shift
up. +ince the factor supplies are fi7ed( there can be no increase in factor utili'ation( but output
has risen( because both factors are more producti!e. At the original factor prices( there is now
e7cess demand( which causes both the real wage and the rental price of capital to rise. %hese
increases in factor prices distribute the increased output to the inputs( so that the income share of
each input in total output does not change. %he factor prices stop rising when the" are e.ual to
the higher marginal product that results from the impro!ed technolog".
-8) Consider an econom" in which 3/8 : 3 H 388
8.3
<
8.3
. Calculate the long-run e.uilibrium
!alues of factor prices and incomes.
Answer$ Capital?s share of income is 38N( so the rental price of capital e.uals 18.3 3/8)L388 :
8.1/. %
he .uantit" of labor input e.uals
3 L 18
8.3
388 3
3/8
: /-. <abor?s share of income is 38N( so the

real wage e.ual 18.3 3/8)L/- : -./.
3.3 Distribution of Oational Ancome
1) %here are no .uestions for this section.
Answer$
22

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Macreconomics: Policy and Practice (Mishkin)

Chapter 3 Aggregate Production and Productivity

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: /-. <abor?s share of income is 38N( so the

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