Blueland is a small island country which specializes in the ...

[Alygatorr01285]

Blueland is a small island country which specializes in the production of yachts. It has a Cobb-Douglas aggregate production function.
 
  i) How will the production of yachts get affected if the technology used for production in Blueland improves?
  ii) How will Blueland's output get affected if both efficiency units of labor and capital stock increase by 12.5 but the level of technology remains unchanged?

Question 2

According to the functional distribution of income, in the United States,
 
  A) capital earns most of the income.
  B) the income earned by capital and labor are approximately equal.
  C) labor earns most of the income.
  D) land earns most of the income.
  E) entrepreneurs earn most of the income.

[joshraies]

Answer to Question 1

i) A Cobb-Douglas production function is of the form: Y = A  Ka  Hb. Y denotes total output, A denotes the level of technology, K denotes the capital stock and H denotes the number of efficiency units of production. A higher value of A denotes better technology. Thus, if the technology used for production in Blueland improves, A will increase. This will cause Blueland's production of yachts to increase.
ii) A Cobb-Douglas production function exhibits constant returns to scale. Therefore, a 12.5 increase in both efficiency units of labor and capital stock in Blueland will lead to a 12.5 increase in its output.

Answer to Question 2

C