SECOND EXAM KEY
Short Questions (5 points each)
Suppose that labor, capital, and energy inputs must be combined in fixed proportions.
this mean that returns to scale will be constant?
No, the fact that labor, capital, and energy inputs must be combined in fixed proportions
does not imply that returns to scale will be constant.
In such a situation, returns to scale
could just as easily be increasing or diminishing.
To judge the nature of returns to scale, we
must consider the relation between the increase in output caused by a proportionate
increase in all inputs.
If output increases faster (slower) than all inputs, returns to scale are
Returns to scale are constant when a given increase in all inputs
leads to a proportionate increase in output.
What is meant by the"pace" of
economic productivity growth, and why is it important to
The pace of productivity growth is the rate of increase in output per unit of input.
example, if the amount of output produced in the economy were to grow by 5% following
only a 2% increase in the quantity of inputs employed,
then the overall rate of productivity
growth would be roughly 3%.
When productivity growth is robust in the overall economy,
economic welfare per capita rises quickly.
When productivity growth is sluggish, economic
welfare improves slowly.
If productivity growth is robust for individual companies, or
within specific industry groups, superior efficiency is suggested and exceptional profitability
Thus, the rate of productivity growth is important both for managers and
investors in individual companies, and for decision makers in the
Cite some potential causes and possible cures for the productivity slow down in the U.S.
Productivity growth has been relatively slow in the U.S. since the early 1970s.
past 30 years, annual rises in productivity in nonfarm businesses have averaged only 1.1%, a
drastic decline from the 2.8% annual rate common during prior periods.
This slowdown is
similar in timing and magnitude in many advanced industrial economies.
As a result, it
cannot be explained by purely domestic factors.
Slower growth of inputs, both physical and human capital, is not a major cause of
the productivity slowdown.
In the U.S., the capital-labor ratio has grown a bit more slowly
since 1973, but only enough to account for roughly one-tenth of the approximately 2%
decrease in productivity growth.
Moreover, the rate of increase of human capital, as
measured by the average education level and experience of workers, has actually increased
since the 1950s and 1960s.
Human capital growth is now responsible for roughly one-
quarter of total productivity growth during the past 30 years, up from only 3% during prior
Thus, while policies to increase investment, education, and training, are important,
they do not address the under-lying causes of the recent productivity slowdown.
From an accounting perspective, almost the entire productivity slowdown in the