Write down the general form of the production (as in chapter 3 equation 3.1). Th

Question

Write down the general form of the production (as in chapter 3 equation 3.1).  

The letter “A” in the production function refers to Total Factor Productivity (TFP). What does this measure?

What is the impact of a rise in A (=TFP) on production?

Provide an actual (real world) example of a shock that would cause A to rise?

Why does the production function become flatter as the input rises? Explain.

Suppose that the production function of a Firm is NOT Cobb-Douglas, but instead looks like this:       Y = 0.2 (K + N0.5). Use calculus to derive the MPN .

Illustrate the impact of the shock discussed in question 1.c. above on the production function and the labor market. Label all curves, all axes, and indicate on the diagram all changes and movements in the curves. Why does output change? Provide a complete discussion (give intuition).

Explanation / Answer

1) The general form of production function is :

Y = A F( K , L )

2) A or Total Factor Productivity is the measure of total effectiveness of all the factots of production that are used in the economy . It is a measure of economic efficiency or the better utilization of resources that leads to cross country difference in income .

3) When TFP rises , it means that efficiency of utilization of resources has risen . So the amount of output produced with a particular mix of inputs will rise . With the same amount of inputs more output can be produced when TFP rises .

4) Innovation can cause TFP to rise . Let us take the example of cloth mills . After installation of electric handlooms more clothes could be manufactured using same amount of labor .

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