Question

The production function for an entire economy is typically viewed as an aggregate of all the microeconomic firm-level production functions. The figure below depicts such an aggregate production function for an economy. The economy is currently at point A in the figure below.

In 2011, a major earthquake and tsunami in Japan destroyed significant physical capital, including roads, homes, factories, and bridges. Using your knowledge of the Solow model of economic growth, what would be the effect on the aggregate production function of such a destruction of physical capital in Japan? Shift the curve, or shift the point on the production function, to depict the impact of the destruction of physical capital.

Answer 1