Question

30. Scenario: Capital An economy initially has 200 units of physical capital per worker. Each year it increases the amount of physical capital by 10%. According to the aggregate production function for this economy, each 1% increase in physical capital per worker, holding human capital and technology constant, increases output per worker by 0.25%. Reference: Ref 9-14 (Scenario: Capital) Look at the scenario Capital. If there is no inflation and output per worker is initially $1,000, what does the estimated output per worker equal after one year? $1,225 $2,500 $1,250 $1,025

Answer 1

$1,025

Step-by-step explanation:

An economy initially has 200 units of physical capital per worker.

Each year it increases the amount of physical capital by 10%.

Each 1% increase in physical capital per worker, holding human capital and technology constant, increases output per worker by 0.25%.

Therefore 10% increase, increases output per worker by 2.5%.

If output is initially $1,000, then the estimated output per worker after one year equal $1000 x 1.025 = $1,025