Question

Suppose the current level of output is 5000 and the elasticity of output with respect to labor is 0.7. A 10% increase in labor would increase the current level of output to?

Answer 1

The new level of output after a 10% increase in labor is 5350.

Step-by-step explanation:

The elasticity of output with respect to labor can be calculated using the formula: elasticity = (% change in output) / (% change in labor). In this case, the elasticity is given as 0.7, which means that a 1% increase in labor will result in a 0.7% increase in output.

Since the current level of output is 5000, a 10% increase in labor will lead to a 10% x 0.7% = 7% increase in output. To calculate the new level of output, we can multiply the current output by 1 + 7% = 1.07.

Therefore, a 10% increase in labor would increase the current level of output to 5000 x 1.07 = 5350.