Suppose the current level of output is 5000.If the elasticities of output with respect to capital and labour are 0.3 and 0.7 respectively,a 10% increase in capital combined with a 5% increase in labour would increase the current level of output to
A)5015.
B)5325.
C)5600.
D)5650.

Question

Quizplus · Accepted Answer

The elasticity of output with respect to capital is 0.3, which means that a 10% increase in capital will increase output by 3%. The elasticity of output with respect to labour is 0.7, which means that a 5% increase in labour will increase output by 3.5%. Therefore, a 10% increase in capital combined with a 5% increase in labour would increase output by 3% + 3.5% = 6.5%. This would increase the current level of output from 5000 to 5000 * 1.065 = 5325.

Suppose the Current Level of Output Is 5000