Scenario: Two Economies, a and B, Have Identical Aggregate Production

question 53

Multiple Choice

Scenario: Two economies, A and B, have identical aggregate production functions with diminishing returns. In both economies, capital and labor are equally important for production. Economy A has twice as many efficiency units of labor as economy B. Economy B has twice as much physical capital stock as economy A.
-Refer to the scenario above.Over time,economy A develops sophisticated technology,and human capital becomes less and less valuable in the production of goods and services that require more and more physical capital.How will this affect economy A's aggregate production function?

• A) It will shift up and become less steep if physical capital stock is held constant.
• B) It will shift up and become less steep if total efficiency units of labor are held constant.
• C) It will shift to the left if physical capital stock is held constant.
• D) It will shift to the left and become steeper if total efficiency units of labor are held constant.

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Definitions:

Capital

Long-term assets or the money used to support long-term assets and projects. Long-term debt and equity on the balance sheet.

Profitability Index

A capital budgeting tool that measures the relationship between the present value of cash inflows and the initial investment, indicating the relative profitability of a project.

Cost of Capital

The rate of return a company must earn on its projects to maintain its market value and attract funding, often consisting of debt and equity costs.

Cash Flows

The aggregate sum of funds moving into and out of a company, particularly influencing its liquidity.