2. Explain the profit maximizing rule that firms follow when they decide how much capital and labor to hire.
Exercises Do problems 1 and 3 for practice (don’t hand in)
5. The empirical fit of the production model: The table below reports per capita GDP and capital per person in the year 2014 for 10 countries (In 2011 dollars). Your task is to fill in the missing columns of the table. You can either write directly on the table or fill in the columns on a separate piece of paper.
a) Given the values in columns 1 and 2 in the table below, fill in columns 3 and 4. That is, compute per capita GDP and capital per person relative to US values. b) In column 5, use the production model (with a capital exponent of 1/3) to compute predicted per capital GDP for each country relative to the US, assuming there are no TFP differences. c) In column 6, compute the level of TFP for each country that is needed to match up the model and the data.
Capital per person Per capita GDP Implied Capital Per Pre- TFP to per capita dicted match person GDP y. data United 141842 51958 1 States Canada 128667 43376 France 162207 37360 Hong 159247 45095 Kong South 120472 34961 Korea Indonesia 41044 9797 Argentina 53821 20074 Mexico 45039 15521 Kenya 4686 2971 Ethiopia 3227 1505
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