Q1.

In the following diagram you are given two technologies, A and B, which can produce
100 metres of cloth. Technology A uses 1 worker and 4 tonnes of coal, while technology B
uses 4 workers and 2 tonnes of coal. The diagram also depicts three examples of isocosts,
NM, GF and JH. The wage cost and the price of coal are denoted by w and p, respectively.
Which of the following statements is correct?

A. Isocost JH corresponds to the case where the w = $20 and p = $10.

B. Isocost NM is the only one of the three isocosts depicted which corresponds to the case
where w = $20 and p = $10.
C. When w = $20 and p = $10, the cost of using technology A is $60.
D. The cost of using technology B is the same for both isocost JH and isocost GF.

A. The slope of the isocost JH is - w/p = -1/2, which corresponds to w = $10 and p = $20.
B. When w = $20 and p = $10, the slope of the isocosts would be -w/p = -2. Therefore, both
NM and GF correspond to this case.
C. When (w, p) = (20, 10), at A, c = ($20 × 1) + ($10 × 4) = $60.
 D. The total cost (and hence the isocost) depends on the value of w and p, so could differ for
the same technology. The cost of using technology B would depend on which isocost
represents the current (w,p).
Q2. In the following diagram you are given two technologies, A and B, which can produce
100 metres of cloth. Technology A uses 1 worker and 4 tonnes of coal, while technology B
uses 4 workers and 2 tonnes of coal. The diagram also depicts three examples of isocosts,
NM, GF and JH. The wage cost and the price of coal are denoted by wand p, respectively.
In case 1, the wage cost and the price of coal are (w, p) = (20, 10), while in case 2, (w, p) =
(10, 20). Which of the following statements is correct?

a. Technology B would be chosen in both cases 1 and 2.

b. Technology A would be chosen in case 1 while technology B would be chosen in case 2.
c. Technology B would be chosen in case 1 while technology A would be chosen in case 2.
d. Technology B would be cheaper under case 1 than under case 2.
a. Isocosts NM and GF correspond to case 1 while isocost JH corresponds to case 2. In case
1, the isocost NM going through A is lower than the isocost GF going through B (due to
lower total cost). This implies that A would be chosen instead of B in case 1.
b. Isocosts NM and GF correspond to case 1 while isocost JH corresponds to case 2. In case
1 the lower isocost goes through A, implying that A would be chosen. Similarly in case 2,
isocost JH would be lower than the corresponding isocost that would go through A, and
therefore B would be chosen.
 c. Isocosts NM and GF correspond to case 1 while isocost JH corresponds to case 2. In case
1 technology A would be chosen, while in case 2 technology B would be chosen.
d. Under case 1 the cost of technology B is c = ($20 × 4) + ($10 × 2) = $100. Under case 2
the cost is c = ($10 × 4) + ($20 × 2) = $80. Therefore technology B is cheaper under case
2.

3. In the following diagram you are given two technologies, A and B, which can produce
100 metres of cloth. Technology A uses 1 worker and 4 tonnes of coal, while technology B
uses 4 workers and 2 tonnes of coal. The diagram also depicts three examples of isocosts,
NM, GF and JH. The wage cost and the price of coal are denoted by wand p, respectively.
In period 1, the wage cost and the price of coal are (w, p) = (10, 20) and the firm is
employing technology B. In period 2, the wage cost and the price of coal change to (w, p) =
(20, 10). The price of the cloth is 2 per metre in both periods. Which of the following
statements is correct?

A. In period 1, the firm’s profit per 100 metres of cloth is $100.

b. If the firm employs technology B in both periods, then the profit level would be the same in
both periods.
C. The economic rent of switching to technology A in period 2 is $60.
d. There is a positive economic rent in switching from technology B to A in period 2, as A is the
more energy-intensive technology.

a. The profit is revenue minus total cost. The revenue is ($2 × 100) = $200 per 100 metres.
The total cost with technology B in period 1 is ($10 × 4) + ($20 × 2) = $80. Therefore the
profit is $200 – $80 = $120.
b. The profit is revenue minus total cost. The revenue is $2 × 100 = $200 per 100 metres in
both periods. The total cost with technology B in period 1 is ($10 × 4) + ($20 × 2) = $80,
while it is ($20 × 4) + ($10 × 2) = $100 in period 2. Therefore, the profit would decrease
from $120 to $100.
c. The economic rent is the change in profit from using technology A instead of B. Afterthe
costs change, this change in profit is ($200 – $60) – ($200 – $100) = $140 – $100 = $40.
Note that economic rent is the increase in profit from the ‘other course of action’ given
prices and costs, which in this case is technology B when (w, p) = (20, 10).
d. This is true – the cost of labour has increased relative to the price of coal in period 2, so
there is a benefit in switching the technology to a more energy-intensive one.

Q4. In the following diagram you are given two technologies, A and B, which can produce
100 metres of cloth. Technology A uses 1 worker and 4 tonnes of coal, while technology B
uses 4 workers and 2 tonnes of coal. The diagram also depicts three examples of isocosts,
NM, GF and JH. The wage cost and the price of coal are denoted by wand p, respectively.
Your firm competes with many other firms in this cloth market. In period 1, the wage cost
and the price of coal are (w, p) = (10, 20) and the price of the cloth is 2 per metre. All firms
employ technology B in period 1. In period 2, the wage cost and the price of coal change to
(w, p) = (20, 10). Which of the following statements is correct?
 A. If your firm is the only firm switching to technology A in period 2, then your innovation
rent is $140 per 100 metres of cloth.
b. If all firms are able to switch to technology A then they will all enjoy positive innovation
rents, both in the short run and long run.
c. If a few firms are unable to switch to technology A from B then these firms will go bankrupt.
d. The first firm to adopt technology A in period 2 is called the initiator.

a. The profit if the price of cloth remains at 2 in period 2 is ($2 × 100) – ($20 × 1 + $10 × 4)
= $140 if adopting technology A, and $2 × 100 – ($20 × 4 + $10 × 2) = $100 if remaining
with technology B. Therefore the innovation rent is $140 – $100 = $40.
b. If all are able to switch, then competition will drive the cloth price down to the point
where no one is earning innovation rents.
c. This is the process of Schumpeterian creative destruction.
d. The first firm to adopt an innovation is called the entrepreneur.

5. The following graph shows wages relative to the cost of capital in England and France
from 1580 to 1830. Based on this information, which of the following statements is correct?
a. In the early 1800s, the nominal wage level was 50-70% higher in England than in France.
b. The rise in the relative wage level in England is solely attributed to the rise in the absolute
wage level.
c. The rise in relative wage level in England would have encouraged innovations in more
labour-intensive technologies.
d. On a graph with the number of workers on the horizontal axis and the amount of capital on
the vertical axis, the graph for England represents a steepening of the isocost lines.

a. The wage level relative to the cost of capital was 50-70% higher in England. This does
not necessarily mean that the absolute nominal level was higher by that much.
b. This cannot be inferred from the graph, which only depicts the relative wage level
changes. In reality, the higher relative wage level in England was due to both a higher
absolute wage level and cheaper coal.
c. The rise in the relative wage level would have encouraged innovations in less labour-
intensive/more capital-intensive technologies in England.
d. A rise in relative wages w/pwould indeed represent steepening of the isocost lines.

6. Which of the following statements is correct?

a. Factors of production are the factories in which the goods are produced.
b. A production function describes the amount of output that will result for different
combinations of inputs.
c. Average product of labour is the average quality of the goods produced by the workers.
d. Diminishing average product of labour refers to the diminishing quality of goods produced.

a. Factors of production are the inputs into the process of production, such as labour, land,
energy, etc.
b. This is correct – a production function describes the differing technologies capable of
producing the same good.
c. Average product of labour refers to the quantity and not quality of production. It is the
total output divided by the number of workers.
d. Average product of labour refers to the quantity and not quality of production.
Diminishing average product of labour refers to falling output per worker when more
labour is used.

7. The following table describes the production function of cloth. Based on this
information, which of the following statements is correct?

a. The production function exhibits diminishing average product of labour at all levels of labour
input.
b. The average product of labour when the number of workers is 400 is 10 metres.
c. When 300 workers are employed, the first 200 workers produce 12.5m each while the next
100 workers produce 11m each.
d. As the number of workers is increased from 100 to 500, the average product of labour falls by
20%.

a. The production function initially exhibits constant average product of labour.

b. The average product of labour when the number of workers is 400 is 4,400 / 400 = 11m.
c. The numbers suggest that the average output of 300 workers is 12m. It states nothing
about how this output is distributed among the workers.
d. This is correct – the average product of labour is 12.5m at 100 workers but falls to 10m,
which is a 20% decrease.

8. The following diagram depicts a production function for grain. Which of the following
statements are correct?
a. The production function exhibits constant average product of labour for the first 800 workers.
b. The production function exhibits constant average product of labour between 800 and 1600
workers.
c. The production function exhibits constant average product of labour when the number of
workers is more than 1600.
d. There is an upper limit to how much grain can be produced.

a. This is correct; the average product of labour is 500,000 / 800 = 625kg per worker.
b. The average product of labour is diminishing even when the production function is linear,
if the slope of the rays from the origin to the production function is decreasing.
c. The average product of labour is diminishing when the production function is horizontal
as the slope of the rays from the origin to the production function is decreasing.
d. Yes. The upper limit is 800,000kg (the horizontal section of the graph).

9. According to Malthus, which of the following are the causes of diminishing average
product of labour?
a. More labour is devoted to a fixed quantity of land.
b. The new land brought into cultivation is of inferior quality.
c. Coordination problems due to a larger labour force.
d. Environmental effects of over-cultivation (e.g. increased carbon emissions).

a. This is the main cause of diminishing average product of labour.

b. The fact that the new land for cultivation had not been farmed previously suggests that it
was of lower quality.
c. This was not one of the reasons suggested by Malthus.
d. This was not one of the reasons suggested by Malthus.

10. Which of the following statements regarding the Malthusian model are correct when
there is a positive one-off technological shock (such as an improved seed)?
a. There is an immediate and permanent rise in the average product of labour.
b. The population initially rises but then falls to the pre-technological shock level.
c. Income initially rises but then falls to the subsistence level in equilibrium.
d. Malthus’ Law states that an increase in productivity will result in both increased population
and wages in the long run.
a. A key assumption of the Malthusian model is the diminishing average product of labour
as population rises.
b. The population settles at a higher level as a result of the positive technological shock.
c. Subsistence level is the level at which there is no population growth. This is the
equilibrium.
d. Malthus’ Law states that an increase in productivity will result in a larger population but
not increased wages in the long run.