Suppose the rate of economic growth in Mainland was 25 percent,capital growth 30 percent,and labour growth 20 percent.If labour contribution to economic growth is 14 percent,how much is the elasticity of output with respect to labour?

Question

Quizplus · Accepted Answer

The formula for elasticity of output with respect to labor is:

Elasticity of Output w.r.t. Labor = (Contribution of Labor to Economic Growth / Labor Growth) * (Output Growth / Economic Growth)

Given, 
Economic Growth = 25%
Capital Growth = 30%
Labor Growth = 20%
Contribution of Labor to Economic Growth = 14%

Output Growth = (Economic Growth) * (1 + Elasticity of Output w.r.t. Capital)
             = 25% * (1 + 30%) = 32.5%

Now, 
Elasticity of Output w.r.t. Labor = (14% / 20%) * (32.5% / 25%) 
                                 = 0.7
                                 
Therefore, the best choice is B with the explanation that the elasticity of output with respect to labor is 0.7.

Suppose the Rate of Economic Growth in Mainland Was 25