In the economy of Cape Despair, the subsistence real wage rate is $15 an hour. Whenever real GDP per hour rises above $15, the population grows, and whenever real GDP per hour of labour falls below this level, the population falls. The table shows Cape Despair€™s production function. Initially, the population of Cape Despair is constant and real GDP per hour of labour is at the subsistence level of $15. Then a technological advance shifts the production function upward by 50 percent at each level of labour.

a. What are the initial levels of real GDP and labour productivity?
b. What happens to labour productivity immediately following the technological advance?
c. What happens to the population growth rate following the technological advance?
d. What are the eventual levels of real GDP and real GDP per hour of labour?

Transcribed Image Text:

Labour (billions of hours per vear) 0.5 Real GDP (billions of 2000 dollars 15 26 2.0 2.5 35