Microeconomics
5th Edition
ISBN: 9781319098780
Author: Paul Krugman, Robin Wells
Publisher: Worth Publishers
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Chapter 2, Problem 9P
To determine
Your dormitory roommate plays loud music most of the time, you, however prefer more peace and quiet. You suggest that she buy some headphones. She responds that although she would be happy to use headphones, she has many other things that she would prefer to spend her money on right now. You discuss this situation with a friend who is an economics major. The following exchange takes place:
He: How much would it cost to buy headphones?
You: $15
He: How much do you value having some peace and quiet for the rest of the semester?
You: $30
He: It is efficient for you to buy the headphones and give them to your roommate. You again more than you lose, the benefits exceed the cost. You should do that.
You: It just isn’t fair that I have to pay for the headphones when I’m not the one making the noise.
(a)
Which part of the conversation is positive and which part is normative?(b)
Construct different arguments based on different situations.Concept Information:
Positive Economics:
It is based on facts and purely objective. It describes the economic issues without judging them. It is also referred to as "the economics of what is". To determine whether a statement is positive or not, we must analyze that whether the statement can be falsified or not. If it can be tested and proven, it is a positive statement.
Normative Economics:
It not only focuses on the economic issues but it judges them as well. It is based on values. It is also called the "economics of what ought to be". To identify a normative statement, one should look for modal verbs such as should, ought, or must.
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Consider an economy that exhibits both population growth (L grows at rate n) and
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Y = F(K, AL) = Ka (AL)¹-α
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[5 marks]
(d) Show that at the Golden Rule steady state the saving rate for this economy is
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[6 marks]
A firm faces the following production function,
Y = AKα L¹-a
(1)
Here Y is output, K is capital, L is fixed labour, and A is a measure of technology.
The firm uses an optimal amount of capital determined by the condition,
MPK = r +8
(2)
Where MPK is the marginal productivity of capital, r is the real interest rate, and ♪ is
the depreciation rate.
(a) Using equations (1) and (2) find an expression for K*, the optimal amount of
capital the firm should use.
[3 marks]
(b) Referring to your result from part (a), comment on what happens to K* when
each of the following variables change (holding other variables constant),
(i)
The measure of technology (A) falls
(ii)
The depreciation rate (8) increases
(iii)
The real interest rate (r) increases
[2 marks]
[2 marks]
[2 marks]
[Hint: For each of parts (i)-(iii) you are being asked to comment on what happens to
K* if just the variable mentioned in the question part changes. Your answer should
state whether K* increases, decreases, or stays the…
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