What is the change in total factor productivity

Reference no: EM13758886

1. Consider an entry game with two pharmaceutical firms, an incumbent (I) and a potential entrant (E). Market demand for a baldness cure is given by p = 100 - Q.

Each firm has constant marginal cost equal to $40. If there is only one firm supplying the market (i.e. the Incumbent), it will behave like a monopolist. If the Entrant enters, the two firms will compete and receive profits of $400 each. Suppose the timing of the game is as follows:

1. The Incumbent decides whether to offer the Entrant $450 to not enter.

2. The Entrant decides whether to enter the industry. If the Entrant enters, it forfeits any payment from the Incumbent.

3. Active firms compete.

(a) Draw the game-tree for this problem. You will need to calculate the payoff to the incumbent if the Entrant does not enter.

(b) Solve for the Subgame Perfect Nash Equilibrium.

2. Consider a simplified version of the Solow Growth Model. Assume per capita output is given by qt=Aktα

Assume depreciation, δ, is not 100 percent such that the amount of capital available at time t+1, kt+1, is given by kt+1 = sqt + (1-δ)kt.

(a) Assume A=100, s=0.25, δ=0.5, α=0.5, and k0=100. What is the "steady state" level of capital and output per worker? Solve for this mathematically.

(b) Using Excel, verify your answers from part (a). Include an Excel print-out with your answer.

3. Suppose the per capita production function in period 1 is given by q₁=3k1 0.5 and the per capita production function in period 2 is given by q₂=9k2 0.5.

(a) What is the change in total factor productivity (or A) between periods 1 and 2?

(b) If k1=9 and k2=16, what share of the rise in per capita income (or output) is attributable to technical change? What share is attributable to capital accumulation?

Be sure to include a well-labeled diagram to answer parts (a) and (b)!

Reference no: EM13758886

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