1. What is productivity growth?
A) 10% B) 11% C) 12% D) 13%
2. What is the growth of income per capita (income per worker)?
A) 10% B) 11% C) 12% D) 13%
3. In the Romer model, productivity improvement continues inde?nitely if
A) Researchers have constant productivity B) Production is subject to perfect competition C) Old ideas help generate new ideas D) There is no growth in any country
4. Consider the effect of giving aid to a developing economy in the Romer model with spillovers. Let a be the amount of aid per person given each year. "Total income available" for a country is then Y+aN, where Y is the amount of total output. Describe what happens in a Romer economy with research spillovers (case 2). In particular, assume that the amount spent on purchasing (all) ideas is a fraction of total income available, s(Y+aN), so the value of a patent is PA = 1+r r s(Y+aN) A . At the same time, the total compensation for workers is always (1-θ)Y. Assume before the start of foreign aid, the economy was in its long-run equilibrium. Describe what happens in the long-run and short-run to (a) the number of researchers versus production workers and (b) the growth rate of productivity. (Hint: For the long run, think about the fact that aid is a constant amount, while output Y is growing.)
15. Consider the model of labor supply that we considered in class. Speci?cally, an individual who seeks to maximize U(consumption) +V(leisure)
subject to the budget constraint:
PC = WL
where P is the price of consumption, W is the nominal wage rate, and L is time devoted to work.
(a) Argue that if W and P both increase proportionately the optimal choice of how much to work does not change.
(b) In class we asked what would happen to optimal labor supply ifWwere to increase. Analyze what happens to labor supply if P increases. Speci?cally, does our theory predict what will happen? Explain your answer. If income and substitution effects are roughly offsetting on average, what would you predict would happen to average desired labor supply in the event of an increase in P ?
6. Consider a small modi?cation to the one period labor supply problem that we studied in class. Speci?cally, assume that the individual seeks to maximize utility, U(C) + V(Leisure) subject to the budget equation PC = WL+D. The only new element in this problem is D, which represents dividend income that the individual receives. The government is going to institute some taxes, and is considering two different options. Option one is a proportional tax on labor income, i.e., a tax on labor income at rate τL. The second option is a proportional tax on dividend income, i.e., a tax on dividend income at rate τD. Assume that whichever option is chosen, the tax rate will be set so as to raise the same amount of revenue from this individual. Contrast the implications of these two different tax options for the choices of C and L that the individual makes. In answering this question assume that the values of P, w, and D are not affected by the tax plan.