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UCLA
Prof. E. McDevitt
Economics 102
STUDY QUESTIONSSET #1
Introduction
and
Review
1. What is GDP and why are goods and services counted in GDP at market value?
2. Why are intermediate goods not counted in GDP?
3. Explain why total production necessarily equals total expenditure.
4. Distinguish between real GDP and nominal GDP. How do we convert nominal GDP into real GDP?
5. What are the different components of GDP? What is the economic definition of investment?
Production and the Labor Market
1. a. What is a production function?
b. Consider the CobbDouglas Production Function: Y = AK
α
L
1
α
with 0 <
α
<1. Demonstrate that this production
function exhibits constant returns to scale.
c.Find the MPL and MPK equations. Find APL and APK. What is the relationship between MPL and APL? …between
MPK and APK.
d. Draw a graph of the production function with Y on the vertical axis and L on the horizontal axis. The production
function slopes upwards, but its slope falls as L increases. What is the economic interpretation of these characteristics?
Draw a graph of MPL.
e. What factors cause the production function to shift?.
. MPL curve to shift?
2. Company Z has the following production function.
L
Number of Horseshoes Produced
0
0
1
8
2
15
3
21
4
26
5
30
a. Find MPL for each level of employment.
b. Company Z can get $6 for each horseshoe it produces. How many workers will it hire if the nominal wage is $38? If it
is $28?
3. Assume that the production function for the US is Y=AK
0.3
L
0.7
. The following data give real GDP (measured in
billions of 2000 dollars), K (in billions of 2000 dollars), and L (in millions of workers) for the US economy in various
years. [Data on Y from St. Louis FRED database, data on K from Bureau of Economic Analysis ; Data on L is from
Bureau of Labor Statistics.]
Year
Y
K
L
1980
5,162
5.831
99.3
1990
7,113
7,809
118.8
2000
9,817
10,392
136.9
2004
10,756
11,249
139.3
a. How much did US total factor productivity (A) grow between 1980 and 1990? Between 1990 and 2000? Between
2000 and 2004?
b. Use the above production function to find the equations for
MPL and MPK. Find the MPL and MPK
in 1980. Find
APL
in 1980 and show that MPL = 0.7APL. Assuming each factor—L and K—were paid their marginal product,
calculate labor income and capital income for 1980. Calculate labor’s share of income and capital’s share of income.
4. a. Demonstrate that the profitmaximizing level of employment for a pricetaking firm occurs when the value of
marginal product (P*MPL) equals the nominal wage (W) (or expressed in real terms, when the MPL equals the real
wage rate).
b. Show that for the CobbDouglas production function Y = AK
α
L
1
α
with 0<
α
< 1 if workers are paid their marginal
product (that is, the real wage rate W/P= w equals MPL), then 1
α
represents labor’s share of national income.
c. Again consider Y = AK
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 Spring '08
 Serra
 Economics, Macroeconomics

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