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Answer to Question #49151 in Macroeconomics for andrea vitta

Question #49151

. Assume the country of Freedonia has $500 of capital per worker and has a workforce of 20 million. Also assume that labor and capital split output evenly between themselves.

a. Ignoring total factor productivity. What is output per worker? What is total output?
b. If actual output per worker is $1000 what is total factor productivity? What is the wage rate? What is the return to capital?
c. Suppose a wizard appears and suddenly makes half of the capital stock disappear. What is output per worker? What is the wage rate? What is the return to capital? (Assume everything for question 1b holds initially) Do you think that perhaps the wizard owned some of the capital stock left over? Why?
d. Suppose aliens visit earth and bring with them technological advances that double total factor productivity. What is output? What is output per worker? What is the wage rate? What is the return to capital? (assume everything for question 1b holds initially)
Expert's answer
a. Output per worker is $500. The total output is $500*20 million = $10 billion. 
b. If actual output per worker is $1000, the total factor productivity will be TFP = 10 billion/(500*20 million) = 0.5. The wage rate will be $500. The return to capital will be 50%.
c. The output per worker will decrease by half too. The wage rate will be $250. Return to capital will be the same.
d. The output will double to $20 billion. Output per worker will double too and will be $1000. The wage rate will also double and become $1000. The return to capital will be the same.

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