Question

True and False

1 When applied to real-world data, the Solow model does pretty well in explaining how amounts of capital and labor can impact aggregate production.

2 Two countries with the same Gini coefficient have the same Lorenz curve.

3 For risk averse individuals, having a greater ability to do consumption smoothing means they are more likely to choose profitable but risky activities.

Answer 1

1. False.

Solos model predicts that growth in aggregate production or aggregate income can be explained by growth in labor and growth in capital. In real world, changes in labor and capital don't explain all the differences in economic growth we see among countries.

2. False.

Economies with similar incomes and and Gini coefficients can still have different income distributions. This happens because Lorenz curves can have different shapes yet the same Gino coefficient.

3.True

Risk averse individuals, even with a greater ability to do consumption smoothing will choose will choose risky activities as there is a reduction in their absolute risk aversion.