Economics of Growth – Eco 466
Fall 2020-21, Answer Key for ODD Questions of Midterm Examination II
Instructor: Mustafa Tu˘gan
January 25, 2021
Question 1 [30 points]
•(a) Consider a technique in the real wage-profit rate schedule that intersects the wage
axis at xand the profit rate axis at ρ(call it the original technique).
–(ODD) Illustrate in the schedule a labor-saving but capital-consuming technical
change that intersects the wage axis at x∗and the profit rate axis at ρ∗(call it
the alternative technique). (5 points)
Answer:
v
w
x∗
x
ρ∗ρ
In the above diagram, the dashed red line shows the alternative technique that
is labor saving and capital consuming. The original technique is shown with a
dotted blue line. In the alternative technique, the labor productivity must be
higher and capital productivity must be lower than the corresponding ones in the
original technique.
–(EVEN) Illustrate in the schedule a labor-consuming but capital-saving technical
change that intersects the wage axis at x∗and the profit rate axis at ρ∗(call it
the alternative technique). (5 points)
–(Both ODD and EVEN) Illustrate in the schedule the efficiency frontier corre-
sponding to the original and alternative techniques. Explain your answer. (10
points)
2
Answer:
v
w
ws
x∗
x
ρ∗ρ
The efficiency frontier describes the technique selected by entrepreneurs at each
wage level. Since the entrepreneurs select the technique with the highest profit
rate at each wage level, the efficiency frontier can be shown as the solid black line.
At wage levels above ws, the alternative technique with a higher labor productivity
is selected. At wage levels below ws, the original technique is chosen. Thus, ws
