Question

Suppose that z, the marginal product of efficiency units of labor, increases in the endogenous growth model. What effects does this have on the rates of growth and the levels of human capital, consumption, and output? Explain your results

Answer 1

In the endogenous growth model, the efficiency of human capital plays an important role in determining statel state level of output per efficient worker apart from labor and capital

An increase in the marginal product of the efficiency of labor increases the demand for labor. This increased demand in turn increase the wage rate for labor in the economy and therefore, it increases the output.

But this increase in the marginal product of efficiency of labor does not alter the rates of economic growth.

The increase will lead to higher expansion paths for both consumption and output. However, these paths have the same economic growth.

Hence, An increase in the marginal product of the efficiency of labor increases both consumption and output but does not have an impact on the economic growth rates.