Assume that the production function is Cobb-Douglas with parameter α = 0.3. In the neoclassical model, if the labour force increases by 10 percent, then output:
A)increases by about 10 percent.
B)increases by about 7 percent.
C)increases by about 3 percent.
D)does not increase since the new workers are unemployed.

Question

Quizplus · Accepted Answer

In the Cobb-Douglas production function, output is proportional to labor raised to the power of alpha. If the labor force increases by 10 percent, output will increase by about 7 percent (0.1 * 0.3 = 0.03, or 3 percent, and 1 + 0.03 = 1.07, or 7 percent).

Assume That the Production Function Is Cobb-Douglas with Parameter α