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Intermediate Macroeconomics
Econ 121
Midterm I Solutions
Short Answer.
1.
Explain the concept (in words
or
in math) of constant, decreasing, and increasing
returns to scale.
Be clear and concise.
IN WORDS…
A production function exhibits constant returns to scale if inputs are scaled by a certain
amount and the subsequent outputs are scaled by the same amount.
A production function exhibits decreasing returns to scale if inputs are scaled by a
certain amount and the subsequent outputs are scaled by less than that amount.
A production function exhibits increasing returns to scale if inputs are scaled by a certain
amount and the subsequent outputs are scaled by more than that amount.
IN MATH…
Refer to example in the lecture notes.
Note that
if a student had just written some
parameter bounds for the sum of
α
and
β
without specifying any type of production
function or idea behind it, no credit was given.
2.
If the production function
( )
L
K
F
Y
,
=
exhibits constant returns to scale, what can we
conclude about the marginal products of capital and of labor?
If a production function is constant returns to scale, then the marginal products of each
input must diminish.
3.
Give two endogenous variables in the simple version of the Solow Model.
Output, Capital
4.
Give two exogenous variables in the simple version of the Solow Model.
Savings rates, Depreciation Rates, Population Growth Rates
5.
Productivity can be decomposed into two distinct components.
Name them.
Technology and Efficiency
6.
The following equation states that Money Supply multiplied by the Velocity of Money
is equal to the Price Level multiplied by Output:
MV=PY
.
Write the expression that
relates these four variables over time.
That is, what is the mathematical relationship
between the GROWTH RATE of the four variables? (
hint:
^)
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 Fall '08
 HOWITT
 Macroeconomics

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