Consider an economy with the production function with A=10, K=100, and N=400, Suppose labour participation rates decline as a greater proportion of the population attends University full time before entering the job market so that N declines to N=380. In this case, Group of answer choicesBoth the Marginal Product of Labour and the Marginal Product of Capital increase.Both the Marginal Product of Labour and the Marginal Product of Capital decrease.The Marginal Product of Labour increases while the Marginal Product of Capital decreases.The Marginal Product of Labour declines while the Marginal Product of Capital increases.
Question
Consider an economy with the production function with A=10, K=100, and N=400, Suppose labour participation rates decline as a greater proportion of the population attends University full time before entering the job market so that N declines to N=380. In this case, Group of answer choicesBoth the Marginal Product of Labour and the Marginal Product of Capital increase.Both the Marginal Product of Labour and the Marginal Product of Capital decrease.The Marginal Product of Labour increases while the Marginal Product of Capital decreases.The Marginal Product of Labour declines while the Marginal Product of Capital increases.
Solution
The Marginal Product of Labour (MPL) declines while the Marginal Product of Capital (MPK) increases.
Here's why:
The production function is given by Y = A * F(K, N), where Y is the output, A is the technology level, K is the capital, and N is the labor.
When the labor participation rate declines (N decreases from 400 to 380), the amount of labor available for production decreases. This means that each additional unit of labor (marginal labor) becomes more valuable, because there is less of it available. Therefore, the Marginal Product of Labour (MPL) decreases.
On the other hand, the amount of capital remains the same (K = 100). However, because there is less labor available, each unit of capital can be combined with more labor. Therefore, the Marginal Product of Capital (MPK) increases.
So, the correct answer is: The Marginal Product of Labour declines while the Marginal Product of Capital increases.
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