Neoclassical growth theory is based on the assumption of ________ marginal returns to a single factor and ________ returns to scale exhibited by the aggregate production function.

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Neoclassical growth theory assumes decreasing marginal returns to a single factor because as more and more of that factor (usually capital) is added while holding other factors constant, its productivity diminishes. On the other hand, neoclassical growth theory assumes constant returns to scale exhibited by the aggregate production function because if we increase all factors of production (capital, labor, etc.) proportionally, output should increase proportionally as well.

Neoclassical Growth Theory Is Based on the Assumption of ________