exam 1 practice problems and answers

exam 1 practice problems and answers - 1 Since it satisfies...

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Since it satisfies the constant returns to scale property, in the case of a 50% decline both in capital and labor, output would decrease by the same amount (50%). Here in this question, since we have only a 50% decrease in capital, decrease in output will be less than 50%. From MPL and MPK functions, or the factor markets equilibrium conditions, real wage goes down, real rental price of capital goes up. 2
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Income level goes to capital owners will definitely decrease after a 50% decrease in capital stock. But the fraction of income that goes to capital owners will not change unless the parameter (α) changes. Because level of income paid to capital owners in MPK.K, and from the production function, MPK=A α K α -1 L 1- α K= αA K α L 1- α = αY And the fraction of income goes to capital owners is MPK.K/Y, which is αY/Y= α 3
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An equal decrease in T and G does not change the public savings. But, if MPC is less than 1, a decrease in T will increase take home money (disposable income), therefore
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This note was uploaded on 03/29/2011 for the course ECON 101 taught by Professor Medison during the Spring '11 term at MedU Ohio.

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exam 1 practice problems and answers - 1 Since it satisfies...

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