Scenario: Two economies, A and B, have identical aggregate production functions with diminishing returns. In both economies, capital and labor are equally important for production. Economy A has twice as many efficiency units of labor as economy B. Economy B has twice as much physical capital stock as economy A.
-Refer to the scenario above.If you were to draw the aggregate production functions for economies A and B,holding physical capital stock constant at each county's given level,you would draw ________.
A) one aggregate production function, where economy B's level of production is greater than economy A's level of production
B) two separate aggregate production functions, where the one for economy B lies above the one for economy A
C) one aggregate production function, where both economies' output are at the same level
D) two separate aggregate production functions where the one for economy A lies above the one for economy B

Question

Quizplus · Accepted Answer

Given that both economies have identical aggregate production functions with diminishing returns and that capital and labor are equally important, the fact that Economy A has twice as many efficiency units of labor as Economy B, and Economy B has twice as much physical capital stock as Economy A, would balance out. Thus, when drawing their aggregate production functions with each country's given level of capital stock, both economies would have the same level of output, leading to one aggregate production function where both economies' outputs are at the same level.

Scenario: Two Economies, a and B, Have Identical Aggregate Production