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.Over time,economy A develops sophisticated technology,and human capital becomes less and less valuable in the production of goods and services that require more and more physical capital.How will this affect economy A's aggregate production function?
A) It will shift up and become less steep if physical capital stock is held constant.
B) It will shift up and become less steep if total efficiency units of labor are held constant.
C) It will shift to the left if physical capital stock is held constant.
D) It will shift to the left and become steeper if total efficiency units of labor are held constant.

Question

Quizplus · Accepted Answer

As human capital becomes less important in the production process, the marginal product of labor decreases, leading to a flatter aggregate production function. However, as technology becomes more sophisticated, the marginal product of physical capital increases, leading to a higher level of output for any given level of physical capital. Thus, the aggregate production function will shift up and become less steep if physical capital stock is held constant.

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