Midterm #1: Multiple Choice Questions-Version A Multiple Choice Identify the cho
ID: 1127705 • Letter: M
Question
Midterm #1: Multiple Choice Questions-Version A Multiple Choice Identify the choice that best completes the statement or answers the question 1. Consider the following production function with three input factors, Y = AKaLbHc, where H stands for human capital (e.g., education). The coefficients a, b, and c are numbers between 0 and 1. This production function exhibits constant returns to scale if a. a+b=1 d, e. a+b+c=1 None of the above Consider the production function, Y = F(K, L) = A × K + B L where A > 0 and B > 0 are two positive real numbers. Assuming the rental market for capital is perfectly competitive, the rental price of capital is 2. b. A/(A + B) c. AK/(A + B) e. AK Consider the Solow growth model with aggregate production function F(K, L) = AK0 210.8 and saving rate s 1/4. Suppose the economy is initially at a steady state. A change of the saving rate from s 0.2 leads to a. 3. 1 /4 to s An increase in consumption at all future dates. d. A decrease in consumption in the short run and an increase in consumption at the new steady state An increase in consumption in the short run and no change in consumption at the steady state b. A decrease in consumption at all future dates e. An increase in consumption in the short run and a decrease in consumption at the new steady state c. Among the following production functions, which one is consistent with the US stylized fact for labor and capital shares a. Y = AK1/313/3 4. e. None of the aboveExplanation / Answer
1. Y= AKaLbHc
When doubling the inputs K, L,H .
Then we get, A(2K)a(2L)b(2H)c
Now, 2a2b2c [AKaLbHc] = 2a+b+c (Y) = 2Y when a+b+c= 1
This implies that production function exhibits constant returns to scale when a+b+c = 1. Therefore, option (d) is correct.
2. Y = F(K, L) = AK + BL
The rental market for capital is perfectly competitive , the rental price of capital is : A . Therefore, option (a) is correct.
3. When savin rate change from 1/4 to 0.2 , it means decreases then , an increase in consumption in the short run and decrease in the consumption at new steady state level. Therefore , option (c) is correct.
4. Cobb douglas production function is consistent . Therefore, option (a) is correct.
5. Accoding to production function some countries are richer while others are poor because they have more capital per worker and more efficient technology.
6. Option (b) is correct by saying capital growth should be equal to investment - depreciation .