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.Which of the following statements is true?
A) Productivity must be greater in economy A.
B) The relationship between GDP and total efficiency units of labor must be the same in economies A and B.
C) The relationship between GDP and physical capital stock cannot be the same in economies A and B.
D) All of the above.

Question

Quizplus · Accepted Answer

Given that both economies have identical aggregate production functions with diminishing returns and that capital and labor are equally important for production, the total efficiency units of labor and the physical capital stock, despite being different in quantity between the two economies, contribute to the production in a balanced way. This implies that the relationship between GDP and total efficiency units of labor, as well as the relationship between GDP and physical capital stock, should follow the same pattern in both economies, assuming all other factors are constant. However, the question only states that the relationship between GDP and total efficiency units of labor must be the same, which is true given the information provided.

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