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8. Suppose the production function for a newly discovered product through
research is given by Y = 100(L-F) where Y = output of the new product, L = labor input, and F = fixed amount of labor input required
to invent the idea (cost incurred before the first unit of output can be produced). Assume that there is no production if L < F ; and each
unit of labor L costs a wage rate w.
(a) Find the cost function C(y) that represents the minimum cost
required to produce Y units of output.
(b) Given a price P which the firm faces for each unit of output produced, show that the firm cannot make profit and operate in perfectly competitive market settings.
Consider three of the stylized facts of economic growth: (i) there is a
sheer level of difference across countries in terms of level of income, (ii)
there are differences in long-run growth of economies in the world, and
(iii) economic positions of countries are not immutable.
(a) Discuss how the Solow growth model addresses the three stylized
facts.
(b) What are the major contributions of the Ramsey-Cass-Koopmans
model over the Solow model? How do they differ from the Solow
model in terms of their implications for the three stylized facts
above?
(c) What is the major shortcoming of the Solow growth model?
(d) The AK models are the first generation models in an attempt to
endogenize technology. Why are they still categorized as neoclassical growth models?
(e) Whose works mainly constitute the AK models?
(f) Briefly discuss how theories of expanding varieties, quality ladder,
and technological transfer attempt to fill the gaps in the neoclassical growth model in addressing the three stylized facts?
Consider two small open economies A and B which opted to adopt a
floating exchange rate regime, and a fixed exchange rate regime, respectively. While Country A wants to exercise fiscal policy, Country B
wants to exercise monetary policy.
(a) What are the possible reasons for Country A to adhere to exercising fiscal policy instead of monetary policy?
(b) According to the Mendel-Fleming model and the monetary approach to the balance of payment, what should be the position
of Country A on the policy of liberalizing its (foreign) capital account, i.e. capital mobility? Discuss the reason.
(c) What should be the position of Country B on the policy of liberalizing its (foreign) capital account, i.e. capital mobility? Discuss
the reason.
The budget deficit tends to decrease when
Suppose an increase in air pollution causes capital to wear out more
rapidly, doubling the rate of depreciation. How would this affect
economic growth?
How to reduce budget dificit in an economic advisor
3. Consider an economy with the following aggregates:
Consumption function: C = 50 + 0:8Yd, where Yd is disposable income
Autonomous investment: I¯ = 70
Government expenditure: G¯ = 200
Government transfer: TR = 100
Tax rate: t = 0:20
(a) Calculate the equilibrium level of income, the multiplier, and the
budget surplus in this model.
(b) Suppose that the marginal propensity to consume increased permanently to 0.9. What is the impact of this increase on the level
of equilibrium income and the multiplier?
(c) Suppose that the tax rate t increases to 0.25. Calculate the new
equilibrium level of income, the budget surplus, and the multiplier.
6. Suppose technology stops changing. Explain the impact on economic growth
3. Suppose an increase in air pollution causes capital to wear out more rapidly, doubling the rate of depreciation. How would this affect economic growth?
There is an ongoing debate about whether free trade is beneficial for the global economy. Choose whether you support free trade or if you prefer trade barriers. Be sure to cite specific facts and figures to support your analysis. Remember that there may be more than one perspective that could be equally valid given the circumstances.
