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Macroeconomics

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Calculating Growth and Returns to Scale

MACRO-1FFCYJ

Assume a country has the following production function: $Q = AL^a K^b $. If $a + b > 1$, how will a 20% increase in both labor and capital affect the potential output of this country?

A

There will be less than a 20% increase in output.

B

There will be exactly a 20% increase in output.

C

There will be more than a 20% increase in output.

D

There will be exactly a 400% increase in output.