Assume that the production function is Cobb-Douglas with parameter α = 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

In the neoclassical model, when the labor force is increased by 10 percent, the total output increases by a factor of approximately 0.3(10) = 3 percent. This is because, given the production function Y = A * (L^0.3) * (K^(1-0.3)), increasing labor (L) by 10 percent will result in a proportional increase of 0.3(10) = 3 percent in output (Y). Therefore, the correct answer is B.

Assume That the Production Function Is Cobb-Douglas with Parameter α