Suppose a country's labor supply increases in a year while its physical capital stock remains constant.Which of the following is likely to happen in this case if output is a function of capital and the total efficiency units of labor?
A) Its output per capita will decrease.
B) Its total output will decrease.
C) Its total output will increase.
D) Its total output will remain constant.

Question

Quizplus · Accepted Answer

An increase in labor supply will lead to an increase in the total efficiency units of labor, which will increase the country's total output. This assumes that the production function exhibits constant returns to scale, meaning that a proportional increase in inputs leads to an equal increase in output. Since the physical capital stock remains constant, the output per capita may or may not change depending on the magnitude of the increase in labor supply relative to the population growth. However, we know that total output will increase.

Suppose a Country's Labor Supply Increases in a Year While