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Economics 101 Problem Set 3 Key

# Economics 101 Problem Set 3 Key - 1 Economics 101 Problem...

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Unformatted text preview: 1 Economics 101 Problem Set #3 Brief Answers Department of Economics Professor Siegler University of California, Davis Fall 2010 1. Rivalrous vs. Nonrivalrous Goods (4 points) Explain whether the following goods are rivalrous or nonrivalrous. No credit will be given without an explanation. Recall that rivalry occurs when one persons use of an object inhibits the usefulness of that object to another person. See Section 6.2 of Jones. A. (1 point) A sandwich from the local sandwich shop. Rivalrous; once eaten by one person, no one else can eat it. B. (1 point) The sandwich shop posting the recipe for the sandwich on the internet. Nonrivalrous; anyone with access to the internet can get this recipe and one person using the recipe doesnt preclude anybody else from using the recipe at the same time. C. (1 point) A song sold by iTunes. It depends on how you interpret the question. It is rivalrous when listened to on headphones and because it can be played only on authorized computers. It is nonrivalrous because additional copies are available for purchase to other consumers and it can be listened to by many people at the same time. D. (1 point) A song played on the radio. Nonrivalrous since anybody with a radio can listen to the song at the same time, and one persons listening doesnt diminish the ability of somebody else to listen to it also. The radio is rivalrous, but the song is not. 2 2. The Romer Model (6 points) Consider the Romer Growth Model from Chapter 6: (Output production function) (Ideas production function) (Resource constraint) (Allocation of labor) Recall that 1 Assume parameter values of: 250, 0.08, 0.00025, 2,000 A. (1 point) Given the given parameter values, what is the initial growth rate of per capita output in this economy? Im going to derive the solution below, although you can just use the solution from the book and/or lecture. First, substitute the allocation of labor function into the resource constraint: 1 Next, substitute this into the output production function: 1 Divide by sides by population to get the per capita production function for output: 1 Next, rewrite in terms of growth rates using the growth rate rules: Finally, use the ideas production function to solve for the growth rate of ideas: 3 Therefore, with the given parameter values, the growth rate of output per capita is: 0.00025 0.08 2,000 0.04 That is, the growth rate of output per capita is 4 percent per year. That is, the growth rate of output per capita is 4 percent per year....
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