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.Where would HR lie on the graph if Red Country and Purple Country faced an aggregate production function with constant returns to efficiency units of labor and if efficiency units of labor exceed HP?
A) To the left and below its current level
B) To the right and below its current level
C) To the left and above its current level
D) To the right and above its current level

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.Where would HR lie on the graph if Red Country and Purple Country faced an aggregate production function with constant returns to efficiency units of labor and if efficiency units of labor exceed HP?
A) To the left and below its current level 
B) To the right and below its current level 
C) To the left and above its current level 
D) To the right and above its current level

Quizplus · Accepted Answer

Since the two countries have identical production functions and physical capital stock, the only difference in their output levels would be due to their labor supply. If efficiency units of labor are higher in Red Country (as stated in the scenario), then Red Country's output level must be higher than Purple Country's output level. However, this means that Red Country's production function is steeper than Purple Country's. If both countries face constant returns to efficiency units of labor, then the slope of their production functions must remain constant. Therefore, the only way for Red Country to have a steeper production function than Purple Country is if HR (Red Country's labor supply) is to the left and above HP (Purple Country's labor supply) on the graph.

Scenario: Red Country and Purple Country Have Identical Aggregate Production