Briefly explain the shape of the per-worker production curve in the Solow model. If investment per worker initially exceeds saving per worker, how is the steady-state capital-labor ratio achieved?
What will be an ideal response?
The per-worker production curve is positively sloped because adding capital to each unit of labor increases output per worker. The curve is concave (i.e., increasing at a decreasing rate) because of diminishing marginal productivity of capital; output increases at a slower rate than capital when capital is added to production.
The steady-state capital-labor ratio is the capital-labor ratio at which saving per worker [sf(k)] equals investment per worker [(n + d)k]. If investment per worker initially exceeds saving per worker, then the initial capital-labor ratio exceeds the steady-state capital-labor ratio. The capital-labor ratio will decline because saving is insufficient to provide enough capital to maintain the initial capital-labor ratio. The capital-labor ratio will continue to decline until it reaches the steady-state capital-labor ratio.
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Increasing returns to scale:
a) means that output rises proportionately more than inputs, resulting in increasing per unit costs. b) means that output rises proportionately more than inputs, resulting in lower per unit costs in the long run. c) has the same meaning as increasing costs of production. d) means that output rises proportionately less than inputs, increasing per unit cost of production in the short run. e) implies that the long-run average cost curve is shifting downward.
In a perfectly competitive market, the demand curve faced by an individual firm is:
A. perfectly elastic. B. perfectly inelastic. C. relatively elastic. D. relatively inelastic.
To be counted as unemployed, ________.
A. you must not have a job B. you must be receiving unemployment benefits C. you must not have a job, but have actively looked for a job in the last four weeks D. you must either not have a job or be a part-time worker
When there is an external cost, the unregulated market
A. minimizes public welfare. B. overproduces the good or service. C. underproduces the good or service. D. reaches the most efficient solution.