Question

Productivity concepts. Answer the following questions.

Suppose 2 people and 1 sewing machine will produce 10 t-shirts per day. Also, suppose 3 people and 1 machine will produce 12 t-shirts per day and 4 people and 1 machine will produce 13 t-shirts per day. Suppose 2 people and 2 machines can produce 18 t-shirts per day.

With constant returns to scale, what will 4 people and 2 machine produce per day?

What is average labor productivity and marginal labor productivity (in all cases that you have available data)?

How does average labor productivity depend on the level of capital?

Does this example exhibit diminishing marginal return to labor? How can you tell?

Suppose the initial situation is 2 people and 1 machine. Would this business grow more if labor is increased by one person or if capital is increased by one machine?

Draw two production functions (y=Afor Germany or Madagascar on the same graph, label the functions and both axis.Indicate the relative levels of k and y for each country on your graphs. Answer the following questions:

Which country has higher TFP? Why? How is this reflected on your graph?

Which country has higher capital intensity? Why? How is this reflected on your graph?

Which country has higher labor productivity? How is this reflected on your graph? What factors can be contributing to that?

Draw equilibrium in Solow growth model. Assume an exogenous shift – an increase in savings rate.

Demonstrate the old and the new steady states

Demonstrate the transition to new steady state

Would there be growth in output per worker once the new steady state is reached? Why or why not?

What does Solow growth model predicts about income convergence? What is the intuition for this result? Does the data support this prediction?

Answer 1