Scenario: Red Country and Purple Country have identical aggregate production functions. The amount of physical capital stock available to each country is equal. Labor supply in Red Country is HR, while the labor supply in Purple Country is HP.

-Refer to the scenario above.How will a one-unit increase in the efficiency units of labor change output in Red Country relative to Purple Country?
A) Output will increase more in Red Country.
B) Output will decrease more in Red Country.
C) Output will increase less in Red Country.
D) Output will decrease less in Red Country.

Question

Scenario: Red Country and Purple Country have identical aggregate production functions. The amount of physical capital stock available to each country is equal. Labor supply in Red Country is HR, while the labor supply in Purple Country is HP.
 
-Refer to the scenario above.How will a one-unit increase in the efficiency units of labor change output in Red Country relative to Purple Country?
A) Output will increase more in Red Country. 
B) Output will decrease more in Red Country. 
C) Output will increase less in Red Country. 
D) Output will decrease less in Red Country.

Quizplus · Accepted Answer

In Red Country, an increase in the efficiency units of labor will lead to a greater increase in output compared to Purple Country if Red Country has a higher marginal productivity of labor or a more responsive production function to changes in labor efficiency. This is because the output is directly related to the efficiency and productivity of labor; thus, an increase in labor efficiency units enhances the production capabilities more significantly in the country with a higher responsiveness to such changes.

Scenario: Red Country and Purple Country Have Identical Aggregate Production