BR18B: Bridge: Economic Growth II
Question 1
All of the following are considered factors of production except
A. a vacant piece of land that has never been used.
B. an antique sewing machine that Jill still uses to alter clothes.
C. Randy, who has worked as a mechanic for twenty years.
D. All of the above are factors of production.
Hint
Most factors of production can be categorized as land, labor, or capital.Answer
D. All of the above are factors of production. Factors of production are resources used to produce goods and services. Thus, all of the items listed are examples of factors of production, since each can be used productively.Question 2
Suppose the production function for the country of Westlandia is $Q = K + L$, where $Q$ is output, $K$ is capital, and $L$ is labor. Which of the following statements is true about this production function?
A. Westlandia could achieve economic growth with labor alone.
B. Labor exhibits diminishing marginal returns.
C. Capital exhibits diminishing marginal returns
D. All of the above statements are true.
Hint
Note that the production function is additive. Be sure to calculate the marginal product of each factor.Answer
A. Westlandia could achieve economic growth with labor alone. The production function for Westlandia is additive. Thus, even if $K = 0$, Westlandia could achieve economiic growth with labor alone. On the other hand, the marginal product of both capital and labor is constant, namely, 1. Hence, neither capital nor labor exhibits diminishing marginal returns.Question 3
If Galaxia has a GDP that is 10 times larger than that of Myopia, which country would likely have greater marginal returns to capital based on the law of diminishing marginal returns to capital?
A. Myopia
B. Galaxia
C. Both countries would have marginal returns to capital equal to 0 due to diminishing returns.
D. Both countries would have equal marginal returns to capital.
Hint
The law of diminishing returns states that as additional resources are used to produce a good, the increments to output will become smaller and smaller.Answer
A. Myopia Given that Galaxia's GDP is 10 times that of Myopia, Galaxia is clearly much more developed and will likely have a much larger capital stock. The law of diminishing marginal returns thus suggests that Myopia will have a greater marginal return to capital.Question 4
Which of the following policies would likely not promote economic growth?
A. Reducing the number of student visas issued to international students.
B. Replacing old snow plows with new state-of-the-art snow plows.
C. Offering after-work computer enhancement classes.
D. Awarding scholarships to bright high school students.
Hint
Consider which policies increase the economy's capacity to produce output.Answer
A. Reducing the number of student visas issued to international students. Education raises the level of human capital, which fosters economic growth. Since at least some, and possibly many, educated foreigners would remain in and work in the United States, reducing the number of student visas would not promote economic growth.Question 5
Which of the following government actions would represent the largest increase in physical capital?
A. Taxes on corporate earnings.
B. Investment in hospitals and other health care facilities to modernize their operations.
C. Expansion of research and development in biotechnology.
D. Tax credits to offset college tuition.