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Sheet1 Page 1 BUSINESS 702 SECOND EXAM KEY SPRING 1998 MANAGERIAL ECONOMICS Short Questions (5 points each) 1. Suppose that labor, capital, and energy inputs must be combined in fixed proportions. Does this mean that returns to scale will be constant? 1. ANSWER 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 increasing (decreasing). Returns to scale are constant when a given increase in all inputs leads to a proportionate increase in output. 2. What is meant by the"pace" of economic productivity growth, and why is it important to economic welfare? 2. ANSWER The pace of productivity growth is the rate of increase in output per unit of input. For 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 often ensues. Thus, the rate of productivity growth is important both for managers and investors in individual companies, and for decision makers in the public sector. 3. Cite some potential causes and possible cures for the productivity slow down in the U.S. 3. ANSWER Productivity growth has been relatively slow in the U.S. since the early 1970s. During the 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 periods. 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
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This note was uploaded on 07/31/2011 for the course ECON 1201 taught by Professor Smith during the Spring '11 term at Waseda University.

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