Author Question: In the real business cycle model, a persistent increase in total factor productivity A) increases ... (Read 150 times)

Mr. Wonderful · **on:** Jun 30, 2018

In the real business cycle model, a persistent increase in total factor productivity

A) increases the real wage and increases the price level.
B) increases the real wage and decreases the price level.
C) decreases the real wage and increases the price level.
D) decreases the real wage and decreases the price level.

Question 2

Use the Cobb-Douglas production function to show that a one-unit increase in the labor input will reduce the marginal product of labor and increase the marginal product of capital. Explain each of these results.

What will be an ideal response?

Liamb2179 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

B

Answer to Question 2

MPL = = = . This ratio will decline when L rises. MPK = = = . This ratio increases with L. Adding more labor input causes the capital input to be spread more thinly (each unit of labor has less capital to work with), so output increases at a diminishing rate. More labor input means, also, that the available capital is being used more intensively (each unit of capital has more labor to work it), so the change in output that would result from a change in the quantity of capital is becoming larger.