ECON3102 Macroeconomics Tutorial 02 - Week 3

Java Python ECON3102 Tutorial 02 - Week 3

1. The Value of Life Expectancy:

In the US, average consumption per capita is about $35,000. Life expectancy is 79 years, so in the Jones and Klenow experiment, Rawls would have a 79% chance of being alive. In Bolivia, average consumption per capita is $3,700 and life expectancy is 68 years. Assume that there is no inequality in either country so that everyone who is alive gets the average level of consumption. Assume the following utility function:

with σ = 0.5 and u = 48.1.

(a) Suppose you made a US resident the following offer: you can buy a health plan that costs x dollars per year and will extend your lifetime by one year. What is the price x that would make them indifferent between getting the health plan or not?

Given that, C = $35000, a = 0.79, σ = 0.5, u = 48.1.

(b) How much would a Bolivian resident be willing to pay for such a plan?

Given that, C = $3700, a = 0.68, σ = 0.5, u = 48.1.

(c) Write down the the special case of equation 1 that applies to this example and solve for λ for Bolivia.

Don’t replace any numbers yet, leave it in terms of aUS, aBol, cUS, cBol, σ and u.

(d) Replace the values of aUS, aBol, cUS, cBol, σ and u to find a value for λ. How does it compare to cUS/cBol? Why?

2. Inequality and risk aversion:

Compare the following two countries. Both have a population of 100. Within each coun-try, we label individuals in order of increasing consumption.

In country A, the consumption of individual j is: cA(j) = 100 + 8j.

In country B, the consumption of individual j is: cB(j) = 200 + 4j.

ECON3102 Macroeconomics Tutorial 02 - Week 3

(a) Plot the consumption patterns of each country, with an individual’s label j (which ranges from 1 to 100) on the horizontal axis and their consumption on the vertical axis.

(b) Compute per capita consumption in each country. [Note: if you want, you can ap-proximate sums with integrals].

(c) Suppose the utility function in both countries is:

For what values of σ is expected utility higher in country A? Interpret your results.

3. Korean Unification:

Suppose both North and South Korea have the same technology level (!?), which doesn’t grow, and also have constant population. Their respective populations and capital stocks are:

The Production Function is:

with α = 0.4. The depreciation rate is δ = 0.08.

(a) Compute GDP per capita in each country.

(b) Compute wages and interest rates in each country.

(c) Suppose North and South Korea unify. What is the new L/K in the unified country?

What is GDP per capita in the unified country?

(d) Compute wages and interest rates in the unified country. Interpret

(e) Will people and/or machines physically move between the North and the South? In what direction?

4. An AK problem:

Suppose the production function takes the form.

F(K, L) = AK

(a) Which of the assumptions that we made about F does this satisfy and which does it not satisfy?

(b) Suppose every other assumption we used in the Solow model holds, and there is no technological progress. Find an expression for kt+1/kt .

(c) Will this economy grow in the long run? Explain