Suppose the current level of output is 5000. If the elasticities of output with respect to capital and

labor are 0.3 and 0.7, respectively, a 10% increase in capital combined with a 5% increase in labor

and a 5% increase in productivity would increase the current level of output to

(a) 5015.

(b) 5325.

(c) 5575.

(d) 6000.

Option C is correct one. 5575

Explanation:

Percentage change in output due to percentage change in capital

= (0.3) * (10%) = 3% So, increase in output = (3%) * (5000) = 150

Percentage change in output due to percentage change in labour

= (0.7) * (5%) = 3.5% So, increase in output = (3.5%) * (5000) = 175

Increase in output due to increase in productivity

= (5%) * (5000) = 250

So, increased output = 5000 + 150 + 175 + 250 = 5575