Question

Question 13

a)

Consider the country of Solow,which is described by the Solow-Swan growth model with constant total factor productivity. Let the saving rate 0=0.75.Per

capita output(y)is equal to 100 and the per capita capital stock(k)is 1000. For Solow to be in steady state:

A. the depreciation rate and population growth rate must sum to 0.75

B. the depreciation rate is 0.025 and the population growth rate is 0.05

C. the depreciation rate is 0.25 and the population growth rate is 0.5

D. the sum of the depreciation rate and the population growth rate must be less than 0.075

b)

Consider the country of Solow,which is described by the Solow-Swan model. Let the saving rate 0=0.8;let the population growth rate n=0.05; let the rate of

depreciationd=0.05. If per capita income y=100 and the per capita capital stock k=1000,which of the following is true?

A. Replacement investment is 100, saving is 60 and k will decrease towards the steady state per capita capital stock

B. Replacement investment is 100,saving is 80 ad k is at the steady state per capita capital stock

C. Replacement investment is 100,saving is 80 and k will decrease towards the steady state per capita capital stock

D. Replacement investment is 100,saving is 80 and k will increase towards the steady state per capita capital stock

c)

An economy has two workers,Ben and Curtis.Every day they work,Ben can produce 24 shoes or 24 pants, and Curtis can produce 24 shoes or 12 pants.

Who has the comparative advantage for shoes and pants?

A. Ben for shoes;Curtis for pants

B. Curtis for shoes;Curtis for pants

C. Curtis for shoes;Ben for pants

D. Ben for shoes;Ben for pants

d)

An economy has two workers, Paula and Ricardo.Every day they work, Paula can produce 4 computers or 16 shirts, and Ricardo can produce 6 computers or 12 shirts. Suppose that the market price of computers is 3 shirts per computer. What goods do Paula and Ricardo produce?

A. shirts by Paula;shirts by Ricardo

B. shirts by Ricardo;computers by Paula

C. shirts by Paula;computers by Ricardo

D. computers by Paula;computers by Ricardo

Answer 1

Q. 13.

a) Ans: Option B. the depreciation rate is 0.025 and the population growth rate is 0.05

Explanation:

Given Savings Rate, s = 0.75

Let Population growth rate = n

And, Depreciation Rate = d

Per Capita Output, y = 100

Pee Capita Capital, k = 1000

At steady state we have -

sy = (n+d)k

Or, 0.75×100 = (n+d)×1000

Or, 75 = (n+d)×1000

Or, (n+d) = 75÷1000 = 0.075.

Hence the sum of the depreciation rate and the population growth rate must be exactly equals to 0.075 (no less or no more than 0.075)

If we have depreciation rate, d = 0.025

and Population growth rate, n= 0.05

Then we have, (n+d) = (0.05+0.025) = 0.075

b) Ans: Option C. Replacement investment is 100,saving is 80 and k will decrease towards the steady state per capita capital stock.

Explanation:

Given, Savings Rate, s = 0.8

Population Growth Rate, n = 0.05

Depreciation Rate, d = 0.05

Per Capita Output, y = 100

Per Capita Capital, k = 1000

Replacement Investment = (n+d)k = (0.05+0.05)×1000 = 0.1×1000 = 100

Savings = sy = 0.8×100 = 80

Hence Savings is 80 and Replacement Investment is 100. Since Savings are lower than Replacement Investment, capital will decrease up to a level where a steady state is attained.

c) Ans: Option C. Curtis for shoes;Ben for pants.

Explanation:

In a single day, Ben can produce 24 Shoes or 24 pants.

Hence, for producing 1 shoe Ben requires = 1/24 day and for producing 1 pant Ben requires = 1/24 day.

Relative time requirement for producing Shoe to Ben is =( time required to produce 1 unit of shoe ÷ time required for producing 1 unit of pant )

= { (1/24) ÷ (1/24) } = 1

In a single day, Curtis can produce 24 shoes or 12 pants

Hence, for producing 1 shoe curtis requires = (1/24) day and for producing 1 pant Ben requires = (1/12) day

The realtive time requirement of Curtis for producing Shoe = { (1/24) ÷ (1/12) } = (1/2)

Since the relative time requirement for producing shoes are lower for Curtis , we can say that - Curtis has comparative advantage in production of Shoes.

The theory of Comparative advantage states that if Curtis has comparative advantage in production of shoes, we must have , Ben has comparative advantage in production of Pants.

d) Ans: Option C. shirts by Paula;computers by Ricardo

Explanation:

Given that,

In a single day, Paula can produce 4 Computers or 16 Shirts.

Hence, for producing 1 Computer Paula requires = 1/4 day and for producing 1 Shirt Paula requires = 1/16 day.

Hence the Production Possibility Frontier (PPF) of Paula for a single day =

{ (1/4)×C } + { (1/16)×S } = 1

Where C & S are Units of Computers and Shirts produced by Paula in a single day respectively.

The absolute slope of Paula's PPF is =. { (1/4) ÷ (1/16) } = 4

The slope of PPF suggest the opportunity cost of production. Here the slope of Paula's PPF = 4 means, for producing one more unit of Computer Paula has to sacrifice 4 units of Shirt Production.

Now for Ricardo it is given that,

In a single day, Ben can produce 6 Computers or 12 Shirts.

Hence, for producing 1 Computer Ricardo requires = 1/6 day and for producing 1 Shirt Ricardo requires = 1/12 day.

Hence the PPF of Ricardo for a single day can be written as -

{ (1/6)×C } + { (1/12)×S } = 1

Where C & S denotes the numbers of Computers and Shirts produced by Riccardo in a single day.

The absolute slope of Ricardo's PPF = { (1/6) ÷ (1/12) } = 2

Hence it means, if Ricardo produces 1 more unit of Computer, it requires to sacrifice 2 units of Shirt Production.

Thus we can summarize the opportunity cost of production of Paula and Ricardo as follows -

For Paula : 4 shirts per Computer.

For Ricardo : 2 shirts per Computer.

Hence if market price is 3 shirts per Computer.

It can be stated that in this situation it is optimal for Ricardo to Produce computer. Since by producing 1 more unit computer he has to sacrifice 2 units of shirts but from market he can obtain 3 units of Shirt as market price is 3 shirts per Computer.

Thus Ricardo is in a comparatively better position in producing computer i.e. Ricardo has a comparative advantage in production of Computer.

Again the theory of comparative advantage suggests that, Puala should produce Shirts.