Answer to Question #314652 in Macroeconomics for shefa

Question

Imagine that the aggregate production function is given by Y = F(K, AeL), in which e is workers’ effort. The function F satisfies the usual properties, including constant returns to scale in its two inputs, K and AeL. What happens if e increases?

Answer 1

Constant return to scale is for the two factors together, individually they have a diminishing returns to scale. When e increases the productivity of Labour will increase that is why Swan called Ae productivity of Labour. Due to the DRS, output will increase.