A production function that assumes a diminishing marginal product of capital
A)generates a straight savings line
B)ensures that the savings line is always above the investment requirement line
C)ensures that the savings line and the investment requirement line cross
D)is essential to the endogenous growth model
E)violates important microeconomic principles

Question

Quizplus · Accepted Answer

If the production function assumes diminishing marginal product of capital, the savings line will intersect the investment requirement line. This is because as capital is increased, the additional output produced by the additional unit of capital will eventually decrease, leading to a lower marginal productivity of capital. This makes it necessary for the savings line and the investment requirement line to cross, as the investment required to achieve a certain level of output will increase as more capital is added. Choice A is incorrect because a straight savings line would imply a constant marginal propensity to save, which is unlikely. Choice B is incorrect because the position of the savings line relative to the investment requirement line will depend on other factors such as the level of technology and the labor force. Choice D is incorrect because the endogenous growth model is not dependent on assuming a diminishing marginal product of capital. Choice E is incorrect because the assumption of diminishing marginal product of capital is a fundamental principle in macroeconomics.

A Production Function That Assumes a Diminishing Marginal Product of Capital