Question

Labor Productivity Question

The country of Rupertopia has one factory for all its workers in 2011 and 2012. There were 100 workers in 2011 and 150 workers in 2012. Additionally, there were 200 people living in Rupertopia in 2011 and 1,000 people in 2012. Real GDP was one million dollars in 2011 and two million dollars in 2012. Which of the following statements regarding labor productivity is true:

Select one:

a. More information is needed to determine whether labor productivity in Rupertopia exhibits diminishing, constant, or increasing returns.

b. Labor productivity in Rupertopia exhibits increasing returns.

c.  Labor productivity in Rupertopia exhibits constant returns.

d. Labor productivity in Rupertopia exhibits diminishing returns.

Answer 1

Population 2011 = 200

Labour 2011 = 100

Population 2012 = 1000

Labour 2012 = 150

Real GDP 2011 = $ 1 million

Real GDP 2012 = $ 2 million

We can measure Labour productivity using the following formula

$\large Labour Productivity = \frac{Real GDP}{No. of Labour}$

Year 2011

$\large Labour Productivity = \frac{\$ 1,000,000}{100}$

Labour productivity, 2011 = $ 10,000

Year 2012

$\large Labour Productivity = \frac{\$ 2,000,000}{150}$

Labour productivity, 2012 = $ 13,333.33

Now we are required to calculate the percent increase in Labour participation

$\large \% \triangle L= \frac{150 - 100}{100} *100 = 50\%$

Now calculate the percent change in Labour productivity

$\large \% \triangle LP= \frac{13,333.33 - 10,000}{10,000} *100 = 33.33\%$

As we can see the input increased by 50% but the productivity increased by 33.33%, which is less than 50%. Thus, Labour productivity in Rupertopisa exhibits diminishing returns.

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