5. Expanding Product Variety

Question 1

Rent spillovers

Answer 1

Rent spillovers are transfers of monopoly rents. Innovators may create new rents but they appropriate rents previously granted to other technologies

Question 2

How do private and social gains compare for rent spillovers?

Answer 2

Since innovators don’t internalise these losses, private gains to innovation are larger than social gains

Question 3

Business stealing

Answer 3

Better quality products fully displacing older products

Question 4

Knowledge spillovers

Answer 4

Individual discoveries expand knowledge in general, following the emergence of subsequent discoveries

Question 5

How do private and social gains compare for knowledge spillovers?

Answer 5

Unintended knowledge transfers means private returns are less than social returns

Question 6

What are the two sides to creative destruction?

Answer 6

Obsolescence

Question 7

Obsolescence

Answer 7

The depreciation in value of a technology due to the emergence of a subsequent technology

Question 8

What are the two main endogenous growth models in this section?

Answer 8

-expanding product variety model (Romer 1990)
-schumpeterian model (Aghion and Hewitt 1992)

Question 9

In both models what is the engine of growth?

Answer 9

Research and innovayion

Question 10

What is growth a result of in the models

Answer 10

It is the result of profit maximising firms intentionally investing in product innovation

Question 11

In the EPVM how does growth take form?

Answer 11

In the form of new products

Question 12

In the Schumpeterian model how does growth take form?

Answer 12

Better quality products

Question 13

How is the state of tech represented in the EPVM?

Answer 13

By the mass of available intermediate inputs

Question 14

How are new intermediate inputs created?

Answer 14

R&D use labour to produce them

Question 15

How does people’s welfare change with varieties?

Answer 15

They prefer more varieties and a great mass of the varieties

Question 16

What do we assume about the price of a consumption good?

Answer 16

That it is one (numeraire)

Question 17

Does Bt depend on j?

Answer 17

No

Question 18

Across intermediate inputs what is demand elasticity equal to?

Answer 18

The elasticity of substitution

Question 19

How is the mark up represented in the equations?

Answer 19

1/alpha where alpha determines the amount of variety- lower alpha means more variety

Question 20

What does the markup depend on?

Answer 20

Negatively depends on the elasticity of substitution which is equal to the elasticity of demand

Question 21

Why is the equilibrium symmetric? (Prices and quantities are equal across products)

Answer 21

Because the market is perfectly competitive

Question 22

How many units of intermediate inputs and units of aggregate consumption can one unit of labour produce?

Answer 22

1 unit of intermediate inputs
Akt units of aggregate consumption

Question 23

What can innovators use a patent for?

Answer 23

Produce a variety
Sell it at price vt

Question 24

What are returns to patents positively related to?

Answer 24

Markups and size of market

Question 25

An equilibrium is a path (ct,kt) such that the following holds:

Answer 25

-feasibility condition
-Euler condition
-return to innovation
Initial condition ko

Question 26

Does the economy merge to the BGP?

Answer 26

No it jumps to the BGP at the initial time

Question 27

What does the growth rate depend on?

Answer 27

Positively depends on productivity A and the markup
Negatively depends on rho

Question 28

What is the optimal growth rate?

Answer 28

g=A-rho

Question 29

When does the economy grow too fast?

Answer 29

If the markup is too large