Question

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 :_______

Answer 1

5575

Step-by-step explanation:

The computation is shown below;

Factor Elasticity Increase Effective Increase

A B A × B

Capital 0.3 10% 3.00%

Labor 0.7 5% 3.50%

Increase due to Productivity 5.00%

Total Increase in Output 11.50%

(3% + 3.5% + 5%)

Original Output 5000

Increase in Output (5000 × 11.5%) 575

Increase Output (5000 + 575) 5575