The year is 2060. In the Island of Arabia, where aggregate output is governed by

Question

The year is 2060. In the Island of Arabia, where aggregate output is governed by a Cobb-Douglass production function, the government is considering the elimination of legal barriers that prevent women to participate in the labor market.
Economist A agrues in his blog that these changes will result in an increase in aggregate labor supply. As a result, the new policy will lead to lower wage rates for all workers, males and females.
In a reply,Economist B considers that A's opinion is misleading. She agrees that the new policy will lead to an increase in aggregate labor supply. But she further agrues, using the Solow Model, that the reduction in wage rates will only be temporary. She explains that in the long-run, capital accumulation will lead to a gradual return of wage rates to their original levels.
Evaluate the agruments in this discussion. Is Ms. B right? Explain carefully.

Explanation / Answer

Cobb-Douglass

Y=A*K^a*L^(1-a)

Y = production

A = technology

K = capital

L = labour

Divide by L

y = A*k^a

y = Y/L = production per worker

k = K/L

So production per income is independent of size of the labor force.

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