   Chapter 17, Problem 6WNG

Chapter
Section
Textbook Problem

Again, let labor be the variable shown on the horizontal axis and Real GDP on the vertical axis. Suppose there is an increase in physical capital. Does the increase lead to a movement along the production function or to a shift in the production function? Explain your answer. Next, draw the change in the LRAS curve that results from an increase in physical capital.

To determine

Change in production function and thereby change in the Long Run Aggregate Supply (LRAS) curve.

Explanation

Figure 1 shows the shift of production function and thereby shift in the LRAS curve due to increase in physical capital.

Figure 1

In Panel (a), the horizontal axis indicates the number of labors and the vertical axis indicates the real GDP. Production function shows the output or real GDP, which depends on inputs such as labor (L), physical capital (K), and technological coefficient. At ‘L1’ level of labor, the output produced by the firm is ‘Q1’...

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