Answer :
Final answer:
The correct answer is B) Decreases both output per worker and capital per worker. In the steady state of the Solow growth model, an increase in growth of the labor force dilutes capital per worker leading to lower output per worker, based on the premise of diminishing returns to capital.
Explanation:
In the context of Solow's exogenous growth model, the correct answer to the student's question on the impact of an increase in the growth rate of the labor force on output per worker and capital per worker, in the steady state, is B) Decreases both output per worker and capital per worker. The reasoning behind this is that in the steady state, the growth rate of the labor force will lead to a dilution of the capital available per worker since the increase in labor outpaces the increase in capital that can be made from savings and investment. This results in a decrease in capital per worker, and consequently, given the diminishing returns to capital, a decrease in output per worker.
The Solow model predicts that with an increase in the labor force growth rate, while total output may increase, the increase in the number of workers means that the ratio of capital stock to output would actually decrease, which typically would lead to lower productivity and output per capita, unless there is a commensurate increase in capital or improvements in technology.
