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Key for Midterm 2 Spring 2007

# Key for Midterm 2 Spring 2007 - Economics 100 Key for...

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Economics 100 – Key for Midterm 2 Spring 2007 Page 1 of 4 Question Answer Notes (3 points each for a total of 75 points) 1 E See handout 3a. 2 A See handout 3a. 3 D The compound interest formula is (1 ) return principle r = × + . Here 2 121 (1 ) 100 (1 0.10) return principle r = = × + = + 4 D Rule of 72: n = g /72 where n = number of years to double and g = average annual growth rate of real GDP per person 5 C The aggregate production function is 1/ 3 1/ 3 1/ 3 N T Y AK = 6 C The level of real GDP per person is Y N Y POP POP N = where 1/ 3 1/ 3 Y K T N N N A = 7 A Marginal product of capital is defined as the change in real GDP per worker divided by the change in physical capital per worker 8 D In the labor supply decision, the real wage is the cost of leisure . The substitution predicts that an individual will substitute out of the more costly activity (leisure) and into the less costly activity (labor) and thus work more . 9 A The income effect is the effect of the relative price increase on the well-being or income of the individual. If the real wage ( W ) rises, then workers are better off and as a result will consume more economic goods of which leisure is one. As a result, households will supply less labor according to the income effect . 10 B Along the labor demand curve, firms hire labor until marginal product of labor ( MPN ) = real wage ( W ) 11 D Savings reduces current consumption and increases future consumption. 12 C The marginal revenue earned by the 4th snowmobile is the additional increase in rental from 3 to 4 snowmobiles times \$10 per rental. Therefore, the marginal revenue of the 3rd snowmobile is \$600.

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Key for Midterm 2 Spring 2007 - Economics 100 Key for...

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