ELS Chapter 7: Graphing Exercise 1 Answers
Labor, Productivity and Economic Growth
1. What happens to output and average labor productivity (Y/N) as the number of workers employed increases, holding all other factors that can affect production constant? What happens to the values of Y/N in the table as N increases?
  answer: As you slide the pink triangle in the diagram to the right, output increases but the slope of the line from the origin to the curve (in purple) gets smaller, indicating that Y/N is getting smaller; average labor productivity is falling. The same thing can be seen in the table: as the level of labor employed increases, Y/N (average labor productivity) is falling at each level of labor input, holding all other factors (such as technology) constant.
2. What happens to the level of output and output per worker (average labor productivity) for a given level of employment as labor productivity increases (the productivity index increases)? What happens to the level of output per person?
  answer: As productivity increases, the production function rotates upward, allowing the same number of workers to produce more output. Average labor productivity also increases at each employment level (see the Before and After values for Y/N in the table or note that the line from the origin to the production function gets steeper at each level of employment). If output is growing faster than the population then output per person is increasing and the standard of living (as measured by the amount of output available to be consumed) is increasing.
3. If an economy is currently producing 2000 units of output, what needs to occur to raise production to 3000 units of output?
  answer: One possibility is to increase employment from 400 to 900 workers (slide the purple triangle to the right to see this or look at the table); another possibility is to keep the same level of employment but increase the productivity index by 50%. More generally, economic growth can be achieved by increasing employment or by increasing worker productivity.

4.

 Based on economic analysis of the production function illustrated in this applet, which of the following is most likely to lead to increases in output per person: increases in the share of the population that is working or increases in average labor productivity? Explain.
  answer: Increases in average labor productivity are the key to increasing output per person. Average labor productivity can continue increasing indefinitely through increases in technology and the amount of capital that is available for workers to use. Thus, growth in output is ultimately only limited by the pace of technological change. Growth achieved by increasing the share of the population that is working (or increasing the number of workers) eventually reaches a limit. Changes in technology that increase labor productivity help economies move beyond that limit.