Quiz #2

1. Suppose that the production function for an economy is given by

Y = F(K,L) = AK^1/2L^1/2

Where Y is output, A is the level of technology, K is capital and L is labor.

a. If the value of L is 400, the value of K is 625, and the value of A is 2, what is the value of output in this economy? Show your work.

b. Given the values in part (a), calculate capital productivity. Show your work. Be sure to show the relevant units of measurement in your answer.

c. If labor and technology are held constant, but capital is increased to 900 units, what happens to capital productivity? Verbally describe the effect of this change on capital productivity.

d. In the space below sketch a picture that shows the aggregate production function drawn with respect to labor. In your drawing indicate both the initial situation where capital equals 625 and the new situation where capital equals 900. Label your graph carefully and completely.

2. Use the following information about an economy that produces two goods to answer this next set of questions:

a. What is the value of nominal GDP for year 2? Show your work.

b. Using year 2 as the base year, what is the value of real GDP for year 2? Explain your answer.

c. Using year 2 as the base year, what is the value of real GDP for year 1?

d. What is the value of the GDP deflator for year 1 using year 2 as the base year? Show your work. (Hint: round your answer to two places past the decimal.)

e. If the market basket is defined as 50 bikes and 100 ipods, what is the value of the CPI in year 2 using year 2 as the base year? Show your work. (Hint: assume the CPI is measured on a 100 point scale.)

f. If the market basket is defined as 50 bikes and 100 ipods, what is the value of the CPI in year 1 using year 2 as the base year? Show your work. Round your answer to two places past the decimal.

g. Bonus Question! Was there inflation, deflation or no change in the price level in this economy between year 1 and year 2? Explain your answer.