Yangon University of Economics

Executive Master of Development Studies Programme (EMDevS)

16th Batch (2018-2019)
Macroeconomics
Assignment - I

Name : Hnin Yee Hpwe

Roll No: EMDevS - 14
Date : 4th Nov 2018
Question for Review
1. What determines the amount of real output an economy can produce?

The amount of real output an economy can produce is determined by the quantities of the factor inputs
(labor, capital, others – land, energy…) and the state or level of technology (knowledge) about the use
(productivity) of those inputs.

2. Explain how a competitive, profit-maximizing firm decides how much of each factor of production to
demand.

A competitive, profit-maximizing firm weighs the costs and benefits of employing an additional unit (at the
margin). If the marginal cost (MC) is less than the marginal benefit (MB), it increases profit; if the MC is
greater than the MB, it decreases profit; when MC=MB, profits are unchanged – and are at a maximum
because of either increasing MC and/or decreasing MB due to diminishing returns).

3. What is the role of constant returns to scale in the distribution of income?

First is the basic neoclassical proposition that profit-maximizing firms will employ factors of production
-- labor, capital, and land -- up until the point where each factor’s “marginal value product” -- the
additional revenue produced by the last unit used -- just equals the cost of employing that factor. For
example, such firms will hire workers up until the point where the additional revenue contributed by
the last worker hired just equals the cost of employing the worker.

Second is the proposition that the economy is dominated by industries that exhibit constant returns to
scale -- which is to say that the cost of producing twice as much of a given product is twice as much as
the cost of producing the current level of output. This would be true if, for all or most industries, there
is a lowest-cost way of producing each product, and that most efficient scale of production is small
relative to the overall size of the market. In that case, most industries would consist of lots of those
lowest-cost farms, factories, and shops, while increased demand would be met by building more such
lowest-cost production units.

If both of those propositions hold true-- factors are paid their marginal value product and constant
returns to scale reign -- then by Euler’s Theorem the sum of the payments made to each factor of
production exactly equals the revenue generated in the economy. That is, the output generated by the
economy is divided among workers, suppliers of capital, and landowners according to the amount of
each productive factor supplied and the marginal contribution of each factor to total output.
Problems and Applications
10 . Consider an economy describe by the following equations:
Y=C+I+G
Y = 8,000
G = 2,500
T = 2,000
C = 1000 + 2/3(Y - T)
I = 1200 – 100r
a. In this economy, compute private saving, public saving, national saving.
b. Find the equilibrium interest rate.
c. Now suppose that G is reduced by 500. Compute private saving, public saving, national saving

a.
Consumption = 1000+2/3(8000-2000)
= 5000

Private saving = Y-T-C

= 8000 – 2000 – 5000
= 1000

Public saving = T-G

= 2000 – 2500
= - 500
National Saving = 1000 +(-500)
= 500

b. Equilibrium interest rate;

I = National Saving
 I = 500
500 = 1200 – 100r
-700 = 100 r
r = -700/ - 100
r = 7%

c.
Consumption = 1000+2/3(8000-2000)
= 5000

Private saving = Y-T-C

= 8000 – 2000 – 5000
= 1000

Public saving = T-G

= 2000 – 2000
=0
National Saving = 1000 +0
= 1000