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.As inventors in Purple Country develop and implement new software that helps all citizens complete their work faster,total output in Purple Country will ________.
A) increase slower than in Red Country
B) move closer or even surpass HR
C) increase, because inputs can be used more efficiently
D) remain the same if physical capital stock is held constant

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.As inventors in Purple Country develop and implement new software that helps all citizens complete their work faster,total output in Purple Country will ________.
A) increase slower than in Red Country 
B) move closer or even surpass HR 
C) increase, because inputs can be used more efficiently 
D) remain the same if physical capital stock is held constant

Quizplus · Accepted Answer

With new software, workers in Purple Country can use the labor input more efficiently, which will increase total output. This can happen even if the physical capital stock is held constant. Therefore, total output in Purple Country will increase. The answer choices A and B are incorrect because they imply that the new software will have no effect on total output or will have a negative effect. Answer choice D is incorrect because it contradicts the explanation above.

Scenario: Red Country and Purple Country Have Identical Aggregate Production