Question

A small economy increased its capital per hour worked (k/l) from $10000to $20000. As a result, real GDP per worker(y/l) grew from $2000 to $2500. If the economy increases its capital per worker (k/l) even further to $30000, then which of the following is most likely to be the new real GDP per worker(y/l) (assuming that there is no change in technology)?

A.$3000 B.$2000 C.$3500 D.$2800

Answer 1

Option (D).

When (k/l) increases from $10,000 to $20,000: % Increase = ($20,000/$10,000) - 1 = 2 - 1 = 1 = 100%

When (y/l) increases from $2,000 to $2,500: % Increase = ($2,500/$2,000) - 1 = 1.25 - 1 = 0.25 = 25%

When (k/l) increases from $20,000 to $30,000: % Increase = ($30,000/$20,000) - 1 = 1.5 - 1 = 0.5 = 50%

When (k/l) increases by 100%, (y/l) increases by 25%. Therefore,

When (k/l) increases by 50%, (y/l) increases by (25% x 50%/100%) = 12.5%.

New value of (y/l) = $2,500 x 1.125 = $2,812.5