Topic 3. Long-run production Aggregate production of output Y (e.g. value of a basket of goods and services) in a typica

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Topic 3 Long Run Production Aggregate Production Of Output Y E G Value Of A Basket Of Goods And Services In A Typica 1 (512.76 KiB) Viewed 22 times

Topic 3. Long-run production Aggregate production of output Y (e.g. value of a basket of goods and services) in a typical year is described by the following function: Y = AK13 [2/3 where K is the value of productive capital, L is the total number of labor hours available, and A is a productivity parameter that converts the value of capital-labor hour into units of output. a) Suppose A = 500 K=1000, and L = 1,000. Plot the aggregate production function on a diagram in which Y is on the y-axis and K is on the x-axis. b) Suppose capital has a depreciation rate of 3%. What will be the amount of capital and output next year without investment? If output can be invested or consumed, what is the maximum amount of consumption to make sure there is no drop of output overtime? c) There is a technological breakthrough, so that the effective labor hour is double. Suppose that I remains at 1,000. What is the new A ? Plot the new production function in the same diagram from a). What do you see? d) Divide aggregate production of output by L. Express the corresponding aggregate production function. How do you interpret that new function?