QUESTION 19 Suppose that there are diminishing returns to capital. Suppose also

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QUESTION 19 Suppose that there are diminishing returns to capital. Suppose also that two countries are the same except one has less capital and so less real GDP per person. Suppose that both increase their saving rate from 3 percent to 4 percent. In the long run a. both countries will have higher levels of real GDP per person, and the temporary increase in growth in the level of real GDP per person will have been greater in the country with less capital b. both countries will have permanently higher growth rates of real GDP per person, and the growth rate will be higher in the country with less capital. c. both countries will have higher levels of real GDP per person, and the temporary increase in growth in the level of real GDP per person will have been greater in the country with more capita d. both countries will have permanently higher growth rates of real GDP per person, and the growth rate will be higher in the country with more capital QUESTION 20 In 2010, the imaginary nation of Mainland had a population of 6,000 and real GDP of 120,000. In 2011 the population was 6,200 and real GDP of 128,960. Over the year in question, real GDP per person in Mainland grew by a. 2 percent, which is about the same as average U.S. growth over the last one-hundred years. b.4 percent, which is high compared to average U.S. growth over the last one-hundred years c.2 percent, which is high compared to average U.S. growth over the last one-hundred years. d.4 percent, which is about the same as average U.S. growth over the last one-hundred years

Explanation / Answer

Given, Income of the consumer = $50

Now, given that price of marshmallows = $2.50

Assume, if consumer was to spend all of his income on Marshmallow, then Maximum quantity of marshmallow he can have = 50/2.50 = 20 units.

Thus, the consumer can be on any of the income curve which start from the point (0,20) on the y axis.

Thus, consumer will be on either of 3 indifference curves, i.e. the ones on which we have points B, C and D.

Now, let’s try to see what all conditions are there for Chocolate chips and then see what the optimum decision for the consumer in the given scenario would be?

If you look at the graph, we can see the budget lines which are starting from point (0,20).

Thus, there are only 2 budget lines possible in this case, one which is from (0,20) and (10,0) and the other one being from (0,20) to (20,0).

Now, let’s go one by one,

Here if P = $2.50 for Chips, then if consumer spend all of his budget on Chips, then he would on the point (20,0) or he will be on the outermost budget line.

Total spending on chips = $2.5 * 10 = $25

Remaining budget = 50-25 = $25

Quantity of Marshmallows that can be bought = $25 / 2.5 = 10 units

Thus, optimum solution here = (10,10)

You can do the similar calculations for other options as well and see if we have solutions coming within the range and whether consumer lying somewhere on the outermost two budget lines.

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