Scenario: Assume the following aggregate production functions for two countries, A and B, respectively.
YA=A KA¹/² ᴴA¹/²
ʸB=A KB²/³ ᴴB¹/³
-Refer to the scenario above.Which of the following is likely to happen if physical capital stock increases by 10 percent and efficiency units of labor increase by 10 percent over the next 10 years in Country A?
A) Output will increase by 5 percent.
B) Output will increase by 10 percent.
C) Output will increase by 20 percent.
D) Output will remain constant.

Question

Quizplus · Accepted Answer

According to the production function for Country A, increasing physical capital stock by 10 percent will increase output by (10/2)*1/2 = 2.5 percent, and increasing efficiency units of labor by 10 percent will increase output by (10/2)*1/2=2.5 percent. Thus, total output will increase by 5 percent.

Scenario: Assume the Following Aggregate Production Functions for Two Countries