Suppose than an economy has output Y = A

,that Y equals $42 trillion,capital K is $64 trillion,and labor L is 125 million workers.Given this information,what is the closest approximation of total factor productivity A?
A)less than 0.01
B)around 0.25
C)roughly 0.33
D)close to 0.4
E)exactly 144

Question

Suppose than an economy has output Y = A

,that Y equals $42 trillion,capital K is $64 trillion,and labor L is 125 million workers.Given this information,what is the closest approximation of total factor productivity A?
A)less than 0.01 
B)around 0.25 
C)roughly 0.33 
D)close to 0.4 
E)exactly 144

Quizplus · Accepted Answer

The formula for total factor productivity (TFP) is Y = A*K^α*L^(1-α), where α is the share of capital in income. We don't know the value of α, but it's typically between 0.3 and 0.5. Let's assume that α = 0.4 (the midpoint of the range). Then we have:
42 = A*(64^0.4)*(125*10^6)^0.6
Solving for A, we get:
A = 42 / (64^0.4)*(125*10^6)^0.6
A ≈ 0.397
So the closest approximation of TFP is D, close to 0.4.

Suppose Than an Economy Has Output Y = a