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ECON 3020 - Final Exam (Online)

Fall Term 2020

1. (10 points) True or False? Brieﬂy explain: “That fact that we observe (in the data) that some poor countries do not catch up to richer ones implies that the Solow Model is false”.

2. (15 points) Suppose that markets are perfectly competitive and the aggregate production function is given by Y = AKo Ll − o .

(a) Find the equilibrium wage and interest rate in this economy. Brieﬂy interpret the math. (b) Show whether the payments to inputs (‘factor payments’) add up to aggregate output.

3. (15 points) Consider the production function of Y = AKo Ll − o with α = 1/3. Suppose that the growth rate of output is 3% and that the growth rate of capital is 1%, the labor force growth rate is 2%.

(a) Calculate the growth rate of Total Factor Productivity (TFP). Brieﬂy explain the intuition behind

the Solow Residual.

(b) In this calculation we have not incorporated human capital (which tends to increase over time).

Do you think that omitting human capital underestimates or overestimates the magnitude of the growth in TFP? Why?

4. (10 points) Brieﬂy explain what is “ creative destruction” and give an example.

5. (15 points) An investor in Canada is analyzing whether to invest in diﬀerent projects:

(a) In project A (a pizza restaurant in Winnipeg) the interest rate is 2%, the project requires an initial

investment of F = $3000 and pays $200 every year, starting one year after the investment takes place. Would you recommend to invest in this project?

(b) Another opportunity arises: in project B (an organic agricultural project in Manitoba), the interest

rate is 7%, the project requires an initial investment of F = $1000 and pays $9000 only once, at the end of the second year. In what project would you recommend to invest (A or B)? (assume that the investor can only invest in one project).

(c) Now assume that, due to the pandemic, a new oﬃcial permit might be necessary to open a restau- rant. This involves some additional fees and bureaucracy. Brieﬂy explain how this aﬀects your decision to choose between investing in either A or B.

6. (15 points) Consider a medieval society governed by the Malthusian forces. Assume that, due to a natural disaster, there is a one time drop in the size of the population. Draw a graph showing the path of income per capita, y , over time. Brieﬂy explain the intuition behind this graph.

7. (10 points) Brieﬂy explain the main characteristics of the “demographic transition”.

8. (10 points) Consider the following forecast: “In 2021 income per capita will increase, but so will income inequality.” According to this forecast, brieﬂy explain whether social welfare will increase in 2021(hint: think of the Utilitarian, Rawlsian and in between inequality aversion views)