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

Ans is B) Labor productivity in Rupertopia exhibits increasing returns to scale

Explanation:

In 2011, when there are 100 workers - real GDP was one million dollars

in 2012, when workers increases to 150 - real GDP get double= two million dollars.

As input only increase by (150-100)*100/100 = 50%

while real GDP increases by 100% ( from 1 million to 2 million)

It implies there is increasing return to scale by increment in number of workers is less than the increment in output.