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Quiz1answer - ECO 420-002 and 004 Fall 2008 Quiz 1A On my...

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ECO 420-002 and 004, Fall 2008 Quiz 1A On my honor, I have neither given nor received unauthorized aid on this quiz: ______________ Name:___________________________________________ Section: _______________ 1. A baker who sells bread at $3 per loaf has 100 loaves of unsold bread on December 31 st 2007 which he freezes to sell later. If the bread was sold at $3 per loaf in January of 2008, explain how this transaction will be recorded in GDP during 2007 and 2008. (3 points) In 2007, this will be counted as unsold inventory and added to GDP as increase in inventory. This transaction will not affect 2008 GDP. When the bread is sold in 2008, it will be recorded as C and a negative change in inventory. The last two transactions offset each other thus having no effect on GDP. 2. Consider the production function, Y=K 2 L 0.5 . a. Does this production function exhibit CRS, IRS or DRS? Show algebraically. (3 points) F(zK, zL) = (zK) 2 (zL) 0.5 = z 2.5 K 2 L 0.5 = z 2.5 Y > zY for z>1. Thus this production function exhibits IRS. b. Calculate MPK and MPL. (2 points) MPK = 2KL 0.5 MPL = 0.5 K 2 L -0.5 c. Does this production function exhibit diminishing marginal returns of K? L? Show
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