Xenonia has a larger supply of labor than does Inventia.If the labor supply in both countries increases by the same amount while their physical capital stocks remain unchanged,________.
A) the increase in Xenonia's output will be more than the increase in Inventia's output
B) the increase in Inventia's output will be more than the increase in Xenonia's output
C) Xenonia's income per capita will increase, while Inventia's income per capita will decrease
D) Xenonia's income per capita will decrease, while Inventia's income per capita will increase

Question

Quizplus · Accepted Answer

DThe law of diminishing returns suggests that as more labor is added without an increase in capital, the additional output generated by the new labor decreases. Since Xenonia already has a larger supply of labor, the additional labor will produce less additional output compared to Inventia, where the labor force was initially smaller, making B correct. For D, as both countries' labor forces increase without an increase in capital, the output per capita is likely to decrease in both countries due to the diminishing returns. However, the question's phrasing implies a comparison rather than an absolute change in income per capita, making the explanation for D less directly supported by the given information. The correct interpretation hinges on understanding the law of diminishing returns and its impact on output and income per capita when labor increases without a corresponding increase in capital.

Xenonia Has a Larger Supply of Labor Than Does Inventia