Figure 10-1
-Initially, the economy is at point B on Figure above. According to the Solow model of growth, in the short run, the discovery of a cold fusion process which reduces the cost of energy by 50%, ceteris paribus, will shift the economy from ________.

Question

Figure 10-1 
-Initially, the economy is at point B on Figure above. According to the Solow model of growth, in the short run, the discovery of a cold fusion process which reduces the cost of energy by 50%, ceteris paribus, will shift the economy from ________.

Quizplus · Accepted Answer

The discovery of cold fusion reduces the cost of energy, which means that the economy can produce more output with the same amount of capital and labor. This is represented by the upward shift of the production function from PF1 to PF2, leading to a new steady-state at point H. Since the amount of capital per worker is not affected, the increase in output leads to an increase in per capita output without an increase in capital per capita. Therefore, the correct answer is A.

Figure 10-1 -Initially, the Economy Is at Point B on Figure Above