Answers PS2 - Econ 3140 Spring 2010 Problem Set 2 Answer...

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Econ 3140 Spring 2010 Problem Set 2 Answer Key year 1 output at year 1 prices: L 1 = $46 ; 000 ; the Laspeyres quantity index of year 2 output is L 2 = $62 ; 000 . 1 output at year 2 prices: P 1 = $51 ; 000 ; the Paasche quantity index of year 2 output is P 2 = $66 ; 000 . (These amounts are all calculated in Table 2.4, they just are not labeled this way.) The chain-weighted index is just the geometric mean of the Laspeyres and Paasche indexes: C 1 = ( L 1 P 1 ) 1 2 = (46 ; 000 51 ; 000) 1 2 = $48 ; 400 ; C 2 = ( L 2 P 2 ) 1 2 = (62 ; 000 66 ; 000) 1 2 = $63 ; 970 : Note that the growth rate of real GDP in this case is ($63 ; 970 ± $48 ; 400) = $48 ; 400 = 32 : 06% , which is close to the average growth rate calculated by the Laspeyres ( 34 : 8% ) and Paasche ( 29 : 4% ) indexes, which is 32 : 095% : 2. Plugging the new values of capital ( K ) and labor ( N ) into the production function, we can conclude that output increases in 20% . Note: Recall the concept of Constant Returns of Scale (CRS), that means that if the exponents of K and N sum to one, that means that if factors (capital and labor) double, output doubles. Therefore, in this example if inputs increase in 20% , then output rise 20% . So you do not need to make calculations. 3. Social Security Taxes (a) Since Sally earns $150 ; 000 per year, she is far above the cap, so the Social Security tax doesn±t a/ect her after-tax wage (so there±s no substitution e/ect) -the higher tax only a/ects her income- and thus has only an income e/ect. Since both proposals reduce Sally±s income by the same amount, she±
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This note was uploaded on 11/30/2011 for the course ECON 3140 taught by Professor Mbiekop during the Spring '07 term at Cornell University (Engineering School).

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Answers PS2 - Econ 3140 Spring 2010 Problem Set 2 Answer...

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