MBA 204B: Macroeconomics Problem Set 1

Chapter 2 Problem 4 Place each of the following transactions in one of the four components of expenditure: consumption, investment, government purchases, and net exports a. b. c. d. e. Boeing sells an airplane to the Air Force. Boeing sells an airplane to American Airlines. Boeing sells an airplane to Air France. Boeing sells an airplane to Amelia Earhart. Boeing builds an airplane to be sold net year. - government purchases - investment - net export - consumption - investment

Chapter 2 Problem 8 Consider whether each of the following events is likely to increase or decrease real GDP. In each case, do you think economic well-being most likely changes in the same direction as real GDP? Why or why not? a. A hurricane in Florida forces Disney World to shut down for a month. Decrease real GDP, Yes, same direction - Disney and employees dont make $, consumption of Disneys outputs decreases. b. The discovery of a new, easy-to-grow strain of wheat increases farm harvests. Increase real GDP, Yes, same direction - Quantity of wheat produced/sold increases. c. Increased hostility between unions and management sparks a rash of strikes. Decrease real GDP, Yes, same direction - Company and employees make less. d. Firms throughout the economy experience falling demand, causing them to lay off workers. Decrease real GDP, Yes same direction - Employees dont make income, consume less. e. Congress passes new environmental laws that prohibit farms from using production methods that emit large quantities of pollution. Decrease (likely), production more costly could result in less production and/or higher costs and less demand. Ultimately, this will result in investment in new production methods that will raise GDP. f. More high school students drop out of school to take jobs mowing lawns. Increase in real GDP (short term), No, not same direction long-term well being compromised because workforce will be less skilled. g. Fathers around the country reduce their workweeks to spend more time with their children. Decrease in real GDP, Yes, same direction although we appreciate more family time, economic well-being will be adversely affected. Chapter 3 Problem 1 Use the neoclassical theory of distribution to predict the impact on the real wage and the real rental price of capital of each of the following events:

MBA 204B: Macroeconomics Problem Set 1

a. A wage of immigration increases the labor force. Real wages equals the marginal product of labor. An increase in the labor force will result in diminishing returns to labor causing the real wage to fall. b. An earthquake destroys some of the capital stock. Real rental price equals the marginal product of capital. If an earthquake destroys some capital stock and the labor force is unaffected, the marginal product of capital rises and so do real rental prices. c. A technological advance improves the production function. This will increase the marginal products of both capital and labor. Therefore, both the real wage and the real rental price both increase. d. High inflation doubles the prices of all factors and outputs in the economy. No changes in either because real wage and real rental price of capital are adjusted for inflation. Chapter 3 Problem 2a, 2b, and 2c Suppose the production function in medieval Europe is Y = K L , where K is the amount of land and L is the amount of labor. The economy begins with 100 units of land and 100 units of labor. Use a calculator and equations in the chapter to find a numerical answer to each of the following questions: a. How much output does the economy produce? Y=K
0.5 0.5 0.5

0.5

replacing K and L with 100, your answer is 100.

b. What are the wage and the rental price of land? According to the text, the formulas for the marginal product of labor and the marginal product of capital (land) are:

MPL = (1-) A K L-; MPK = A K-1L1- where = 0.5; A is 1.

Substituting = 0.5; A = 1 and 100 for labor and land, the MPL is 0.5 and MPK is 0.5. c. What share of output does labor receive? MPL x L = .5 x100 = 50 Chapter 3 Problem 6a According to the neoclassical theory of distribution, the real wage earned by workers equals that workers marginal productivity. Lets use this insight to examine the incomes of two groups of workers: farmers and barbers. a. Over the past century, the productivity of farmers has risen substantially because of technological progress. According to the neoclassical theory, what should have happened to their real wages? If farmers have a Cobb-Douglas production function, and A increases, then the MPL also increases. Given a constant supply of farmers, their real wage increases to match the higher MPL .