Suppose the current level of output is 5000.If the elasticities of output with respect to capital and labor are 0.3 and 0.7,respectively,a 10% increase in capital combined with a 5% increase in labor and a 5% increase in productivity would increase the current level of output to
A)5015.
B)5325.
C)5575.
D)6000.

Question

Quizplus · Accepted Answer

The increase in output can be calculated using the formula: ΔY/Y = α(ΔK/K) + β(ΔL/L) + ΔA/A, where α and β are the elasticities of output with respect to capital and labor, respectively, and ΔA/A is the percentage change in productivity. Substituting the given values: 0.3(0.10) + 0.7(0.05) + 0.05 = 0.03 + 0.035 + 0.05 = 0.115. Therefore, the new output level is 5000 * (1 + 0.115) = 5575.

Suppose the Current Level of Output Is 5000