Econ 302 Exam 2 Questions With Verified Answers

economics of ideas - Answer -involves increasing returns to scale -lead to problems with Adam-Smiths invisible hand theory Romer Model divides the world into - Answer 1. Objects -capital and labor inputs from Solow Model -these are finite 2. Ideas -used in production of goods -virtually infinite *this distinction forms the basis for modern theories of economic growth Sustained economic growth occurs because of __________________ - Answer new ideas ideas --- nonrivalry --- increasing returns --- - Answer problems with pure competition non-rival - Answer can be consumed/used by many at the same time (use by one person does not inhibit use by others) rival - Answer use by one person reduces availability to others excludability - Answer (legal) restrictions on use of good or idea -patents, trade secrets, copyrights patents - Answer foster innovation by providing incentives but hinder it because you can't immediately build off of it returns to scale for Romer Model - Answer Firms have high upfront costs so they have to price above P.C. and above marginal cost in order to make economic profit (I.R.) Y = {(X-F)/C , 0) - Answer Y = Output X = Input F = Fixed cost C = Marginal cost Under increasing returns - Answer -can't be pareto optimal -firms incur fixed and marginal costs so if P=MC then the fixed costs won't be recovered so they won't develop new stuff PMC leads to - Answer welfare loss solutions: government funding for basic research or prizes motives aside from profit - Answer -altruistic generosity -desire to signal skills -"purpose motives" Romer Model - Answer A model of sustained economic growth that is driven by the discovery of new ideas -distinction between ideas and objects -output requires knowledge and labor -increasing returns in objects AND ideas (constant in objects alone) new ideas depend on - Answer -existence of "old" in previous period -number of researchers or innovators -researcher/innovator productivity (z) two types of workers - Answer -production workers:Ly -researchers: La Unregulated markets - Answer under provide ideas since ideas are non-rival they can be used simultaneously as - Answer -inputs in production of goods and services -ingredients in development of new ideas Romer Model variables and equation - Answer La: # of researchers ∆A: new ideas z: productivity or researchers ∆At = zLaAt La = Ly = - Answer lL (1-l)L Ly = output workers l = share of labor market that does research Output function - Answer Yt = AtLyt Idea prodiction function - Answer ∆At+1 = zAtLat Resource constraint - Answer L = Lyt+Lat Allocation of labor - Answer Lat = lL Out per person depends on - Answer the stock of knowledge y = Y/L = (AtLyt)/L = (At(1-l)L)/L = At(1-l) growth rate of knowledge/technology is - Answer constant ∆At+1 = zlLAt = ∆At+1/At = zlL = g The stock of knowledge depends on its initial value and its growth rate - Answer yt = At(1-l) At = A0(1+g)t yt = A0(1+g)t(1-l) growth in the Romer Model - Answer -non-rivalrous gives us no diminishing returns -labor and ideas have increasing returns together -returns to ideas are unrestricted -no transition dynamics, instead has balanced growth path -constant growth of all endogenous variables Change in population - Answer 1. Labor goes up 2. growth of knowledge 3. growth of output *only growth effect Change in research share - Answer 1. increase in l 2. increase in g; lower L 3. Yt decreases 4. but g has increased in the future 5. Yt will increase *level effect (intercept change) and growth effect (slope change) growth effects - Answer changes in slope of t and ln(yt) -degree of increasing returns matters for growth effect level effects - Answer changes in intercept of t and ln(yt)