Question 1

Industria and Agraria are two neighboring countries.Suppose Good X is the only good produced in both countries and its production is a function of physical capital and the efficiency units of labor.It is found that a one-unit increase in capital leads to a higher increase in the production of Good X in Agraria than in Industria.Explain this outcome if both countries have the same number of efficiency units of labor.

Accepted Answer

If the number of efficiency units of labor is constant,an increase in physical capital stock leads to an increase in output.However,the increase in output is higher if less capital is used in production.Thus,a one-unit increase in capital causes a higher increase in output if the physical capital stock is smaller.This implies that the physical capital stock in Agraria is smaller than the physical capital stock in Industria.

Question 2

If a country's GDP increases and all other variables remain constant,________.

Accepted Answer

A)   its gross national product will fall
B)   its trade surplus will increase
C)   its income per capita will fall
D)   its income per worker will increase D

Question 3

Scenario: The price of a standard basket of goods in Country A is 10 pesos. The price of the same basket of goods in country B is 25 francs and $5 in the United States. Country A has an income per capita of 60,000 pesos, and country B has an income per capita of 100,000 francs. Assume full employment in both countries.
-Refer to the scenario above.If GDP remains constant but the population in Country B grows by 50 percent over the next 5 years,how will the standard of living change in Country B?

Accepted Answer

A)   People will be more likely to live below the absolute poverty line.
B)   GDP per capita will still be well above the absolute poverty line.
C)   On average, people will live above the poverty line, but some people may live below it.
D)   No definite conclusion can be made without knowing Country B's initial population. B

Question 4

Scenario: The price of an iPhone 5s in the United States is $399. The table below lists the income per capita and the price of the same iPhone in the domestic currencies of four different countries in 2014.
 
-Refer to the scenario above.What is the PPP-based exchange rate between the currency of Country 1 and the U.S.dollar?

Accepted Answer

A)   2.5 units of Country 1's currency for $1
B)   0.4 units of Country 1's currency for $1
C)   1 unit of Country 1's currency for $2.50
D)   1.2 units of Country 1's currency for $1

Question 5

Two countries,Rhodia and Rubium,have identical production functions in the form Y = A × K⁰.²⁵ × H⁰.⁷⁵,where Y denotes total output,A denotes the level of technology,K denotes the physical capital stock,and H denotes the efficiency units of production.Both countries have the same amount of physical capital stock and use the same technology.However,the total efficiency units of labor in Rhodia is higher than that in Rubium.Which of the following is likely to be true in this case?

Accepted Answer

A)   The GDP of Rhodia is higher than that of Rubium.
B)   The GDP of Rubium is higher than that of Rhodia.
C)   The Human Development Index of Rhodia is lower than that of Rubium.
D)   The poverty rate in Rhodia is likely to be higher than that in Rubium.

Question 6

Scenario: The price of a standard basket of goods in Country A is 10 pesos. The price of the same basket of goods in country B is 25 francs and $5 in the United States. Country A has an income per capita of 60,000 pesos, and country B has an income per capita of 100,000 francs. Assume full employment in both countries.
-Refer to the scenario above.The difference between the GDP per capita in Country A and country B is ________.

Accepted Answer

A)   $20,000
B)   $40,000
C)   $10,000
D)   $60,000

Question 7

The following table shows economic data for two countries.
 
-Refer to the table above.GDP per capita is higher in which country?

Accepted Answer

A)   Country A
B)   GDP per capita in Country A is equal to the GDP per capita in Country B
C)   Country B
D)   Cannot determine with the information given above

Question 8

Suppose an economy has the production function Y = A × K¹/⁴ × H³/⁴,where Y denotes total output,A denotes the level of technology,K denotes the physical capital stock,and H denotes the efficiency units of production.Which of the following is true of this economy?

Accepted Answer

A)   Production in this economy exhibits increasing returns to scale.
B)   Production in this economy exhibits constant returns to scale.
C)   Production in this economy exhibits decreasing returns to scale.
D)   Production in this economy decreases when the price level increases.

Question 9

Which of the following is true?

Accepted Answer

A)   The income per worker in a country is lower than its income per capita.
B)   The income per worker in a country is higher than its income per capita.
C)   The income per worker in a country increases when the amount of capital available in the country diminishes.
D)   The income per capita in a country increases when there is an increase in the number of workers.

Question 10

The following figure shows two aggregate production functions.
 
-Refer to the figure above.Which of the following best describes the difference between aggregate production functions 1 and 2?

Accepted Answer

A)   Human capital is higher for function 1.
B)   Physical capital stock is higher for function 1.
C)   The returns for increases in physical capital stock are higher in function 1.
D)   Better technology is employed in function 1.

Question 11

Scenario: Assume the following aggregate production functions for two countries, A and B, respectively.
YA=A KA¹/² ᴴA¹/²
ʸB=A KB²/³ ᴴB¹/³
-Refer to the scenario above.What is true about the aggregate production functions?

Accepted Answer

A)   Country A's production function has higher returns to scale.
B)   Country B's production function has higher returns to scale.
C)   Both countries' production functions have equal returns to increases in K and H.
D)   Both countries' production functions have constant returns to scale.

Question 12

Scenario: Two economies, A and B, have identical aggregate production functions with diminishing returns. In both economies, capital and labor are equally important for production. Economy A has twice as many efficiency units of labor as economy B. Economy B has twice as much physical capital stock as economy A.
-Refer to the scenario above.Economy A has a higher GDP if ________.

Accepted Answer

A)   its working population is bigger than economy B's working population
B)   its population is better educated than economy B's population
C)   its economy is not subject to the Law of Diminishing Marginal Product
D)   it employs more advanced technology in production than does economy B

Question 13

A country's unemployment rate fell from 6 percent to 5 percent during a year.If the country's total population,physical capital stock,and output remain unchanged,________.

Accepted Answer

A)   its income per capita will fall
B)   its income per worker will fall
C)   its income per capita will increase
D)   its income per worker will increase

Question 14

What does the Law of Diminishing Marginal Product state?

Accepted Answer

The answer of What does the Law of Diminishing Marginal...

Question 15

The GDP of a small country is $4,150,000,and the size of its employed labor force is 5,000.The income per worker in the country is ________.

Accepted Answer

A)   $213
B)   $445
C)   $620
D)   $830

Question 16

In an economy,if three-fourths of national income goes to the human capital of workers and one-fourth to physical capital stock,the Cobb-Douglas production function for this economy will be ________,where Y denotes total output,A denotes the level of technology,K denotes the physical capital stock,and H denotes the efficiency units of production.

Accepted Answer

A)   Y = A × K¹/⁴ × H³/⁴
B)   Y = A × K⁴ × H³
C)   Y = A × 1/4 × K × 3/4 × H
D)   Y = A × K¹/³ × H²/³

Question 17

Inventia has 1 million workers.Suppose 50,000 workers migrate from a neighboring country to join Inventia's workforce.Which of the following will happen in this case if Inventia's physical capital stock remains unchanged?

Accepted Answer

A)   The marginal contribution of labor to Inventia's output will fall.
B)   The relationship between output and physical capital stock becomes negative.
C)   The total efficiency units of labor in the economy will decrease.
D)   The country's income per worker will increase.

Question 18

Which of the following tools is used to compare the income per capita across countries?

Accepted Answer

A)   The production possibilities frontier
B)   The purchasing power parity (PPP) 
C)   The headcount index
D)   The GDP deflator

Question 19

Scenario: Two economies, A and B, have identical aggregate production functions with diminishing returns. In both economies, capital and labor are equally important for production. Economy A has twice as many efficiency units of labor as economy B. Economy B has twice as much physical capital stock as economy A.
-Refer to the scenario above.If you were to draw the aggregate production functions for economies A and B,holding efficiency units of labor constant,you would draw ________.

Accepted Answer

A)   one aggregate production function, where economy B's level of production is greater than economy A's level of production
B)   two separate aggregate production functions, where the one for economy B lies above the one for economy A
C)   one aggregate production function, where both economies' output are at the same level
D)   two separate aggregate production functions, where the one for economy A lies above the one for economy B

Question 20

Scenario: Red Country and Purple Country have identical aggregate production functions. The amount of physical capital stock available to each country is equal. Labor supply in Red Country is HR, while the labor supply in Purple Country is HP.
 
-Refer to the scenario above.Where would HR lie on the graph if Red Country and Purple Country faced an aggregate production function with constant returns to efficiency units of labor and if efficiency units of labor exceed HP?

Accepted Answer

A)   To the left and below its current level
B)   To the right and below its current level
C)   To the left and above its current level
D)   To the right and above its current level

Exam 6: Aggregate Incomes