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Midterm 2 - Midterm 2 Version A Midterm 2 Econ 114 August...

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Unformatted text preview: Midterm 2 Version A Midterm 2 Econ 114 August 27th, 2010 Name: _____________________________ Student Id: _________________________ Multiple Choice Answers 1. __________ 2. __________ 3. __________ 4. __________ 5. __________ 6. __________ 7. __________ 8. __________ 9. ___________ 10. __________ 1 Midterm 2 Version A Multiple Choice Questions ~ worth 4 points each 1. When describing the variable, A, in the Solow Growth Model, y = A ⋅ f ( k ) , one might define productivity as a. The level of skills belonging to a particular workforce. b. A measure of the total output of an economy. c. The effectiveness with which capital is transformed into output. d. The amount of physical capital in a country. 2. Which of the following is not an example of inefficiency? a. Old Navy hiring 10 workers to work 20 hours/week rather than hiring 5 workers to work 40 hours/week. b. People who steal bikes on campus. c. The US governments bail out of General Motors, which prevented it from going out of business. d. The US government funds about 30% of Research & Development. 3. If a country specializes in producing a good for which they have a comparative advantage and trades that good on the world market, a. Trade will benefit all the producers in that country b. Trade will benefit the country’s economy only if it is a high income country c. Trade will benefit consumers, by expanding their consumption possibilities. d. Whether or not trade will benefit the country depends on the specific set of circumstances within their economy. 4. Creative destruction refers to a. The fact that creating new technologies often makes old technology obsolete. b. The fact that large sums of money must be invested in research and development in order to create new technology. c. The tendency of researchers to become violent when their experiments do not go as planned. d. The fact that adopting new technology can weaken a countries economy. 5. Due to the fact that technology is ____________ it is costless to transfer, meaning that a new technology will have the potential to benefit everyone in the world. a. b. c. d. Non‐rival Non‐excludable Rival Excludable 2 Midterm 2 Version A 6. Government run businesses are generally ___________ efficient than privately owned companies because _______________. a. More; the government has the power to set the price at which their goods will be sold b. Less; the quantity and type of goods produced by the government is not determined by the market c. More; the government does not have the goal of maximizing profits d. Less; the government has better information than private firms 7. For a research project, you estimate the human capital stock in a country using average years of schooling. However, you know that countries differ in quality of schooling, such that rich countries tend to have high quality schooling and poor countries tend to have low quality schooling. Given that a measure of quality of schooling is not included in your estimates of human capital, what will be true about your estimate of differences in productivity across countries? a. You will have no problem estimating productivity accurately. b. Your estimate of the productivity gap will be too large. c. Your estimate of the productivity gap will be too small. d. You will not be able to make an estimate of productivity based on the available data. 8. According to the graph above, a. Country T has a lower level of productivity than country S b. Country R has a higher level of capital per worker than country T c. Country S has a higher level of output per worker than country T d. Country R has a higher level of productivity than country S 3 Midterm 2 Version A 9. Which of the following would not increase output (or income) per capita in an economy, holding both physical capital and human capital per worker constant? a. Increasing access to complete financial markets. b. Encouraging firms to become monopolies in order to increase their profits. c. Adopting a new technology. d. Opening the economy to the free trade of goods and services 10. When a country with a relatively high savings rate, allows for the free flow of capital, a. The economy will suffer because capital will flow out of the country. b. The economy will benefit because domestic investors will earn a higher return on their investments if they are able to invest abroad. c. The economy will suffer because domestic investors will earn a lower return on their investments if they are able to invest abroad. d. The economy will benefit because capital flows both in and out of the country will be reduced. 4 Midterm 2 Version A Short Answer Questions ~ worth 60 points total 1. Assume that output per capita in both Argentina and Bolivia can be described by the production function y = Ak 1 2 h1 2 . The table below describes the important economic indicators in each country, and all measures are in per capita terms. (32 points) Output (y) Physical Capital (k) Human Capital (h) Productivity (A) Argentina 240 100 64 Bolivia 100 64 25 a. Using the production function given above, calculate the measure of productivity (A) for each country, and fill in the rest of the table. b. Argentina has an income per capital that is 140 percent higher than income per capita in Bolivia. How much higher is productivity in Argentina compared to productivity in Bolivia? c. How much higher is output from the factors of production in Argentina compared with output from the factors of production in Bolivia? 5 Midterm 2 Version A d. What percent of the difference in income per capita between the two countries can be explained by differences in factors of production? e. Now suppose that Economists predict high growth rates in Bolivia over then next 10 years. The table below describes the estimated description of the Bolivian economy 10 years from now. Bolivia Output (y) Today 100 64 25 10 yrs. in the future Annual Growth Rate 180 78 55 Physical Capital (k) Human Capital (h) Calculate the predicted growth rates for all three factors, and fill in the table. f. Estimate the predicted annual growth rate of productivity over the same time period. g. What are the two components that make up productivity? How does each of them work to increase output per person, holding capital stocks constant? 6 Midterm 2 Version A 2. The current round of trade talks facilitated by the World Trade Organization, known as the Doha Round, aims to make international trade fair for developing countries. The deal on the table involved developed nations enforcing intellectual property rights in exchange for reductions in agricultural subsidies in the US and Europe. (16 points) a. The US heavily subsidizes agriculture. What does this tell you about the competitiveness of US agriculture on the global market? b. What purpose do protectionist policies such as agricultural subsidies serve? Who would be harmed by removing these subsidies? c. What group of people within the US would benefit from reducing agricultural subsidies? d. Why are these subsidies detrimental to economies of developing countries? 7 Midterm 2 Version A 3. Economic development tends to be accompanied by extensive migration from rural to urban areas. This problem has to do with the importance of labor mobility between sectors. (12 points) a. Suppose that sector 1 represents industrial manufacturing, and sector 2 represents agricultural production. The graph above shows the marginal product of labor in each sector. If country Y currently employs L’ people in sector 2, explain in words how output could be increased by reallocating resources (labor) to sector 1. b. Suppose industrial jobs are all located in urban areas, and agricultural jobs are all located in rural areas. Why might differences in location cause a barrier to labor mobility, especially in low‐income countries? c. Suppose that agricultural production in country Y is traditionally a family business where firm profits (food) are distributed equally among all workers. Explain why this will encourage a misallocation of labor across sectors. 8 ...
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