Quiz 5 Examples

# Quiz 5 Examples - Quiz 5 Examples Example 1: An aggregate...

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Quiz 5 Examples Example 1: An aggregate production function obeys the law of replication. If the share of capital is 40%, what is the share of labor? The law of replication is that if you increase both inputs, capital and labor, by X% each, then output will increase by X%, since we can always repeat what we have already done. It also assumes that the economy is so large that any increasing returns to scale have been exhausted, or are offset by finite natural resources, so that returns to scale are constant. In that case the share of labor and the share of capital sum to 100%. The share of labor would be 60%. Example 2: Well, then, what about the elasticity of output with respect to labor? What is it? The elasticity of output with respect to labor is the percentage change in output divided by the percentage change in labor that caused it, similar to other elasticities. In the aggregate production function, the elasticity of output with respect to labor is the same as the share of labor, so 0.60. The elasticity of output with respect to capital is the share of capital, or 0.40 in the example. The Cobb-Douglas aggregate production function is Y = TK α N 1-α , where Y is GDP, T is technology, K is capital, N is the number of worker hours, α is the share of capital, and 1-α is the share of labor. In percentage changes, Y* = T* + αK* + (1-α)N*, where the X* means the rate of

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## This note was uploaded on 02/17/2012 for the course ECO 2013 taught by Professor Denslow during the Fall '05 term at University of Florida.

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Quiz 5 Examples - Quiz 5 Examples Example 1: An aggregate...

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