Assume labor's share of income is 80% and capital's share of income is 20%.If we assume constant returns to scale, there are no technological advances, and both labor and capital grow at an annual rate of 3%, then the growth rate of output will be
A)0)6%
B)between 0.6% and 2.4%
C)between 2.4% and 3%
D)3%
E)greater than 3%

Question

Quizplus · Accepted Answer

With constant returns to scale, the growth rate of output will be equal to the sum of the growth rates of labor and capital. 
Total growth rate = Growth rate of labor (3%) × Labor share of income (0.8) + Growth rate of capital (3%) × Capital share of income (0.2) 
Total growth rate = (3% × 0.8) + (3% × 0.2) = 2.4% + 0.6% = 3% 
Therefore, the correct answer is D, 3%.

Assume Labor's Share of Income Is 80% and Capital's Share