Question

The aggregate production function shows a(n) ________ relationship between ________ and output.

A. decreasing; capital stock

B. increasing; capital stock

C. constant; labor

D. decreasing; labor

Country X and Country Y have identical aggregate production functions as shown below. The amount of capital stock available to each country is also equal. However, Country X has LX amount of labor supply while Country Y has LY amount of labor supply.

What does the slope of the aggregate production function imply?

A. Diminishing marginal product of capital

B. Increasing returns to scale

C. Decreasing returns to scale

Answer 1

Answer-1. Correct option is 'B'

The aggregate production function shows a(n) increasing relationship between capital stock and output. When the capital stock increases, holding everything else fixed, the production function shifts up. Then for a given amount of labor, the amount of output produced in the economy increases.

Answer-2. Correct option is 'C'

The slope of the aggregate production function imply diminishing returns to scale. Because both country have identical production function, same amount of capital stock but the labour amount is not same, so flexible labor supply initially give increasing returns but after a point it give diminishing returns. The law of diminishing returns to scale states that as one input variable increased, there is a point at which the marginal increase in output begins to decrease, holding all other input constant.