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Problem Set 2

This document contains 4 questions about production functions and the functions of money. Question 1 involves a Cobb-Douglas production function with land and labor and asks how output, wages, rental prices, and income shares change given changes to population. Question 2 uses another Cobb-Douglas production function and asks how changes to labor, capital, and productivity affect output, rental prices, and wages. Question 3 introduces human capital to a Cobb-Douglas production function and asks about marginal products and how they are affected by human capital. Question 4 asks about the three functions of money and whether certain items can be considered money.

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24 views

Problem Set 2

This document contains 4 questions about production functions and the functions of money. Question 1 involves a Cobb-Douglas production function with land and labor and asks how output, wages, rental prices, and income shares change given changes to population. Question 2 uses another Cobb-Douglas production function and asks how changes to labor, capital, and productivity affect output, rental prices, and wages. Question 3 introduces human capital to a Cobb-Douglas production function and asks about marginal products and how they are affected by human capital. Question 4 asks about the three functions of money and whether certain items can be considered money.

Uploaded by

Mary Jane
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Problem set 2

Q1

Suppose the production function in medieval Europe is Y =K 0.5 L0.5 , where K is the amount of land
and L the number of farmers. The economy begins with 300 units of land and 300 farmers.

(a) How much output does the economy produce?


(b) What are the wage and rental price of land?
(c) What share of output does farmers receive?
(d) If a plague kills one-third the population, what is the new level of output?
(e) What are the new wage and rental price of land?
(f) What share of output do farmers receive now?

Q2

Suppose an economy’s production function is Cobb-Douglas with parameter α =0.4 .

(a) What fraction of income do capital and labour receive?


(b) If immigration increases labour force by 20%. What happens to total output, rental price of
capital, real wage (in percent)?
(c) If an earthquake destroys 10% of capital stock while miraculously causes no death, what
happens to total output, rental price of capital, real wage (in percent)?
(d) Suppose power and energy shortage decrease the value of the parameter A by 20%. What
happens to total output, rental price of capital, real wage (in percent)?

Q3

Consider a Cobb-Douglas production function with three inputs. K is capital, L is labour, and H is
human capital (the number of university graduates among workers). The production function is
1 1 1
Y =K 3 L 3 H 3 .
(a) Derive the marginal product of labour (MPL). How does an increase in the amount of human
capital affect the marginal product of labour?
(b) Derive the marginal product of human capital (MPH). How does an increase in the amount of
human capital affect the marginal product of human capital?
(c) What is the income share paid to labour and human capital, respectively? If human capital
stays with human [ignore artificial intelligence :-) ], what share of total income will workers
receive?
(d) An unskilled worker earns MPL, whereas skilled worker earns MPL+MPH. What is the ratio of
skilled wage to unskilled wage? How does an increase in the amount of human capital affect
this ratio?

Q4

What are the three functions of money? Are the following items ‘money’?
(a) A bottle of luxurious Bordeaux red wine
(b) Credit card
(c) Gift card

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