Assume that the production function is Cobb-Douglas with parameter $\alpha$= 0.3. In the neoclassical model, if the labor force increases by 10 percent, then output:
A) increases by about 10 percent.
B) increases by about 7 percent.
C) increases by about 3 percent.
D) does not increase since the new workers are unemployed.

Question

Quizplus · Accepted Answer

According to the neoclassical model, output increases proportionally to the increase in labor force only when the production function exhibits constant returns to scale. However, since the production function is Cobb-Douglas with a capital share of 0.3, it exhibits decreasing returns to scale. Therefore, output increases by less than 10 percent, specifically by approximately 0.3 x 10 percent = 3 percent.

Assume That the Production Function Is Cobb-Douglas with Parameter α\alphaα = 03 in the Neoclassical Model, If the Labor Force Increases

Assume That the Production Function Is Cobb-Douglas with Parameter $\alpha$ = 03 in the Neoclassical Model, If the Labor Force Increases