Econ201
Professor Ellis Economics 200 Final Examination Winter 2010
Please answer all questions and write legibly. You must explain your answers.
1. The Law of Diminishing Returns (20 points)
During the 14th century, the Bubonic Plague reduced the population of England by one-third in three years. Historians report that afterwards, the prices of goods rose, but wages (incomes) of the survivors rose even more, resulting in higher real incomes for the survivors. Incidentally, the medium of exchange at the time was mainly metal coin, and the stock of metal coin was approximately the same before and after the plague.
a) What effect did the plague have on total (not per capita) output in England?
b) Explain why the prices of goods would be expected to rise?
c) Only humans caught the plague. Using the law of diminishing returns, explain why real incomes would increase.
2. Nonrenewable Resource Extraction (10 points)
The quantity demanded of an exhaustible resource is a function of its price in time periods 1 and 2: , t=1,2. Inverse demand is therefore . Assume that marginal extraction cost is a constant $4, the rate of discount 50%, and the total available reserves of the resource are . What are the dynamically efficient levels of extraction and .
3. Input Demand (30 points)
Kaiser’s produces fruit smoothies. The market for smoothies is perfectly competitive, and the price is $4 a smoothie. The labor market is competitive, and the wage rate is $40 per day. The following table shows relationship between the amount of labor, L, employed, and the quantity, Q, of smoothies produced each day:
L 1 2 3 4 5 6
Q 7 21 33 43 51 55
a. Calculate the marginal product and the value of the marginal product for labor.
b. How many workers will Kaiser hire to maximize its profit and how many smoothies per day will Kaiser’s produce?
c. Kaiser’s installs a machine that increases the productivity of workers by 50%. If the price remains
Please answer all questions and write legibly. You must explain your answers.
1. The Law of Diminishing Returns (20 points)
During the 14th century, the Bubonic Plague reduced the population of England by one-third in three years. Historians report that afterwards, the prices of goods rose, but wages (incomes) of the survivors rose even more, resulting in higher real incomes for the survivors. Incidentally, the medium of exchange at the time was mainly metal coin, and the stock of metal coin was approximately the same before and after the plague.
a) What effect did the plague have on total (not per capita) output in England?
b) Explain why the prices of goods would be expected to rise?
c) Only humans caught the plague. Using the law of diminishing returns, explain why real incomes would increase.
2. Nonrenewable Resource Extraction (10 points)
The quantity demanded of an exhaustible resource is a function of its price in time periods 1 and 2: , t=1,2. Inverse demand is therefore . Assume that marginal extraction cost is a constant $4, the rate of discount 50%, and the total available reserves of the resource are . What are the dynamically efficient levels of extraction and .
3. Input Demand (30 points)
Kaiser’s produces fruit smoothies. The market for smoothies is perfectly competitive, and the price is $4 a smoothie. The labor market is competitive, and the wage rate is $40 per day. The following table shows relationship between the amount of labor, L, employed, and the quantity, Q, of smoothies produced each day:
L 1 2 3 4 5 6
Q 7 21 33 43 51 55
a. Calculate the marginal product and the value of the marginal product for labor.
b. How many workers will Kaiser hire to maximize its profit and how many smoothies per day will Kaiser’s produce?
c. Kaiser’s installs a machine that increases the productivity of workers by 50%. If the price remains