pro #3 - Econ 100B Macroeconomic Analysis Fall 2008 Problem...

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Econ 100B: Macroeconomic Analysis Fall 2008 Problem Set #3 ANSWERS (Due September 15 - 16, 2008)
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On one side of a single sheet of paper: 1. Clearly and accurately draw and label a diagram of the Production Function relating economic activity to employment. 2. Provide an economic explanation of the shape of the curve(s) in your diagram in #1. The production function shows the positive relationship between economic output, Y, and employment, N, for a given level of technology, A, and the capital stock, K. The production function slopes upward because there are increasing returns to labor , i.e., as employment increases, economic output also increases. The slope of the production function decreases as employment increases because of the diminishing marginal product of labor , i.e., as employment increases, economic output also increases but by progressively smaller and smaller amounts. 3. List the endogenous and exogenous variables in this model. Endogenous variables: Economic output, Y, and employment, N. Exogenous variables: Technology (or productivity), A, and the capital stock, K. 4. List the variables (and the direction of their change) that would shift the Production Function higher. Also provide an economic explanation for why each of these variables would shift the Production Function. An increase in technology from A 0 to A 1 would shift the production function higher. At every level of employment and the capital stock, greater technology would allow greater economic output. An increase in the capital stock from K 0 to K 1 would shift the production function higher. At every level of employment and technology, a larger capital stock would allow greater economic output. Y
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This note was uploaded on 10/14/2008 for the course ECON 100B taught by Professor Wood during the Fall '08 term at Berkeley.

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pro #3 - Econ 100B Macroeconomic Analysis Fall 2008 Problem...

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