ECON 370 MIDTERM

1. (20 points) Carefully define private property rights and its characteristics. Then discuss
how private property rights impacts economic development.
2. (15 points) Explain the capital adjustment equation in the Solow Growth Model. Then
carefully discuss how steady-state equilibrium is established in the Solow Growth Model
using the capital adjustment equation. Do not use any graphics.
3. (15 points) Calculate the relative real GDP per capita difference between Dodger-land
and Angel-land (Dodger-land real GDP per capita / Angel-land real GDP per capita) from
the information provided below. Explain in words what your calculation means. Assume
both countries are in their steady-state and population is constant. Also assume both
productivity and depreciation are the same between the two countries. Capital’s share
of income equals 1/3. Dodger-land’s saving rate is .40, and Angel-land’s saving rate
is .10.
4. (25 points) Suppose a country’s productivity declines. Use the Solow Growth model to
carefully illustrate and explain the impact this development has on the steady-state
level of capital per worker and real GDP per worker. Before you answer the question,
explain what each graph in your diagram represents.
5. (25 points) Use a sully and demand diagram to carefully explain and illustrate the
socially optimal (efficient) output. Then use a supply and demand diagram to illustrate
the impact of a negative externality (air pollution) on output. In this case, does the
market provide the socially optimal amount of the good? Explain why.