Discuss the production function. How does the production function ...

[Starlight]

Discuss the production function. How does the production function relate to the labor market and potential GDP?
 
  What will be an ideal response?

Question 2

Which of the following is classified as a final good or service?
 
  i. tires bought by GM to put on new Tahoes
  ii. mustard bought by Subway to put on its sub sandwiches
  iii. your purchase of online access to the Wall Street Journal
  A) i and ii
  B) i, ii and iii
  C) iii only
  D) ii and iii
  E) ii only

[LegendaryAnswers]

Answer to Question 1

The production function shows the maximum amounts of real GDP that can be produced as the quantity of labor changes, holding constant all other influences on production. As the quantity of labor increases, real GDP increases but at a decreasing rate, that is, the production function shows diminishing returns. The production function stands between the labor market and potential GDP. In particular, the quantity of employment is determined in the labor market. The production function then shows the amount of real GDP that is produced by this quantity of employment. When the quantity of employment determined in the labor market is the equilibrium quantity, then the amount of real GDP produced is potential GDP.

Answer to Question 2

C

[Starlight]

Excellent

[TheDev123]

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