An increase in total factor productivity causes the
A) production fucntion to shift up, labour demand to shift right, and output supply to shift right.
B) production function to shift up, labour demand to shift left, and output supply to shift right.
C) production function to shift up, labour demand to shift right, and output supply to shift left.
D) production function to shift down, labour demand to shift left, and output supply to shift left.
E) production function to shift down, labour demand to shift right, and output supply to shift right.

Question

Quizplus · Accepted Answer

An increase in total factor productivity means that more output can be produced with the same amount of inputs. This causes the production function to shift up, indicating that more output can be produced at any given level of inputs. This increase in productivity also makes firms more efficient, which in turn leads to an increase in demand for labour. This causes the labour demand to shift right. Finally, as more output can be produced with the same amount of inputs, output supply will shift right.

An Increase in Total Factor Productivity Causes the