Tuesday, February 22, 2005
Write your name on your bluebook now.
Do not begin writing in your bluebook until told to do
You have one hour and 10 minutes to complete this exam.
Each question carries the number
of points indicated for a total of 70 points.
Think of it as 1 point = 1 minute.
NB: I prefer brief,
precise, correct answers to long-winded, waffling responses that mistake quantity for quality.
denote the quantities of output, capital, and labor respectively,
consider the (slightly generalized) Sato production function , viz.,
are positive constants and
Show that this production function exhibits
constant returns to scale.
Why does a large fall in the fraction of US national income paid to labor constitute
evidence against the claim that the US aggregate production function is Cobb-Douglas with
constant returns to scale?
. (5 points) Why does the labor demand curve slope downward?
. (10 points) Efficiency wage models of the labor market have the feature that worker
productivity increases with wages.
Give three examples of the mechanisms used to produce this
feature and, for each, give a
explanation of the mechanism, being sure to explain why it
suggests that worker productivity increases with wages.
. (10 points)
Analyze and explain the long-run effects of a rise in the world interest rate on net
exports, saving, investment, and the real exchange rate in a small open economy.
. (10 points)
While relaxing in the Economics Lounge, you pick up a copy of the
and among the letters to the editor notice an item criticizing a recent report on the closed
economy of Ferme in which it was claimed that investment as a fraction of GDP rose from 10%
during the 1970s to 15% during the 1980s while the real interest rate rose from 2.5% to 4%.
writer of the letter states that this claim “is obviously absurd as everybody knows that investment
falls when the real interest rate rises”.
What is your view?
Sato, R., , “Diminishing Returns and Linear Homogeneity: Comment,”