Sketch a production function relating output to labour input. Now imagine that the amount of capital per person increases, thanks to the government borrowing to invest in more capital. Use dotted lines on the same diagram to show the impact on (i) total output and (ii) the average product of labour. Explain your answer. Imagine that the demographic response to a higher standard of living is strongly positive. Using a different colour of line on the same diagram, show how this demographic response to higher incomes would go on to affect incomes in the future. The population is aware that the government borrowing required to finance this capital investment will need to be paid back via tax rises, so they respond by reducing their spending. Using a “Keynesian cross” framework and sketch diagram, model this response as a fall in autonomous consumption, c0.

Approach to solving the question: Detailed explanation:1. Production Function and Labour InputA…

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7th Edition

ISBN:9781305156050

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter18: The Markets For The Factor Of Production

Section18.4: The Other Factors Of Production: Land And Capital

Problem 4QQ

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Sketch a production function relating output to labour input. Now imagine that the amount of capital per person increases, thanks to the government borrowing to invest in more capital. Use dotted lines on the same diagram to show the impact on (i) total output and (ii) the average product of labour. Explain your answer.

Imagine that the demographic response to a higher standard of living is strongly positive. Using a different colour of line on the same diagram, show how this demographic response to higher incomes would go on to affect incomes in the future.

The population is aware that the government borrowing required to finance this capital investment will need to be paid back via tax rises, so they respond by reducing their spending. Using a “Keynesian cross” framework and sketch diagram, model this response as a fall in autonomous consumption, c₀.

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