Question

1. Given a concave production function showing output per worker on the vertical axis and capital equipment per worker on the horizontal axis as shown below

           What would be the effect, on the production function, of technological innovation that improves the capital equipment available to the workers? Briefly comment on the implications of such technological innovations for continued improvements in living standards in the long-run?

Answer 1

Technological innovation shifts the production function upwards. With technological innovation, the output increases with the same quantity of inputs used. Thus, a greater output can be produced with the same input used.

Q1 is the initial production function which shows q1 output level can be produced using k amount of capital used. When there is technological innovation, the production function shifts upward to Q2. We can see that the new production function produces a greater output q2 (increase in output from q1 to q2) using the same amount of capital (k). Thus, technological innovation enhances the capacity of inputs used and increase the production level in a country.

When a country faces continuous innovations and technological improvements then its starts producing more efficiently and on a larger scale using fewer resources. Technological improvement is a one-time investment that increases the fixed cost but lowers the variable and total cost of production. The country starts growing and improving its production capacity which leads to an increase in the standard of living in a country.