Quiz #2
1. Suppose that the production function for an economy is given by
Y = F (K, L) = A K1/2L1/2
Where Y is output, A is the level of technology, K is capital and L is labor.
a. If the value of A is 100, output is 5000 units, and there are 100 units of labor, what is the number of units of capital equal to in this economy? Show your work.
b. Given the values given in part (a), what is output per unit of capital?
c. Write an expression for the marginal product of capital for this production function. Do not calculate a numerical value for this, but provide a general equation for MPK.
d. If there is a technological improvement in this economy and A increases to 200 while labor and capital are unchanged, what will the level of output be in the economy? Show your work.
e. Briefly define diminishing marginal returns. Holding capital and technology constant, does the given production function exhibit diminishing marginal returns to labor? Explain your answer.
In the space provided, decide whether each of the following statements is true (T) or false (F).
2. The GDP deflator equals the real GDP divided by the nominal GDP.
3. Real GDP equals nominal GDP in the base year.
4. The conventional calculation of the CPI involves holding price levels constant as the quantities of different goods in the market basket vary.
5. The CPI understates the level of inflation due to substitution bias.
6. The exclusion of discouraged workers from the pool of unemployed workers results in the unemployment rate overstating the level of unemployment in an economy.