Question

6. Suppose that the long run aggregate production function can be written as Y = A*F(K, L), where Y is the value of aggregate supply of goods and services, A is a measure of the level of technological sophistication in the economy, K is the aggregate capital stock of machinery, and L represents the labor force in the economy. The production function, which relates inputs of K and L to output is represented by F(.). (15 total points) a) Depict this relationship in a graph with the aggregate price level on the vertical axis and output (ie. GDP) on the horizontal axis. (5 points) Price level Y = GDP= national income b) Suppose that there is an increase in participation by women in the workforce. Show how this would affect the production function graph that you drew in part a) (5 points) Price level Y = GDP= national income

Answer 1

a) The aggregate Price lend and output will be posite udy related, an Pune Aso Y = GDP national incore b) This will shift the production function. upward increasing aggregate supply. Therefore, aggregate supply can will shift righwan from Aso to As, ASO lend AL 34= GDPE NI mill be c) The effect of this may be ambiguous. as it income effect may led morken wok les but substitution effect may. lead workers to work more. Therefore if 1) Substitution effect > Income effect. As cuine will shift rightward 2) Substitution Effect L Income effect. As curse will shift lestenard.