- CFA Exams
- CFA Level I Exam
- Study Session 4. Economics
- Reading 11. Economic Growth and the Investment Decision
- Subject 3. Production Function and Growth Accounting
CFA Practice Question
In the Cobb-Douglas production function, if MPL increases, then it's most likely:
A. K/L has increased.
B. labor has increased more than capital.
C. there is a technology improvement.
Explanation: Capital has increased more than labor so MPL has increased.
User Contributed Comments 4
| User | Comment |
|---|---|
| SMcalister | I'm not sure why C) is incorrect. I would have thought that an improvement in tech would lead to increase in MPL and that an increase in K/L would lead to capital deepening with diminishing returns. |
| BB465 | I'm also curious about that same issue SMcalister |
| bruno5104 | For me, if MPL has increased is because of one (or various) of the factor: (1-alpha), Y or L. Increasing MPL means: Y increases and-or; L decreases and-or; (1-alpha) increases. |
| gkbarr88 | MPL reflects the production value of the next unit of labor. In a system with diminshing returns, MPL goes up when fewer resources are allocated to labor->more is allocated to capital. Hence, K/L ratio increases. |