The Neoclassical growth model assumes that,with a given state of technology,increases in the use of a single factor eventually cause the

Question

Quizplus · Accepted Answer

The neoclassical growth model assumes that the production function exhibits diminishing marginal returns. As a result, as more of a single factor, such as capital, is used in the production process, the marginal product of that factor eventually falls. This is in contrast to choice A, where the average product of the factor may increase even as the marginal product falls, depending on how the production function is specified. Choice C is incorrect because the marginal product cannot increase at an increasing rate indefinitely; at some point, it must start to fall due to diminishing marginal returns. Similarly, choice D is incorrect because while the marginal product may initially increase, it must eventually start to fall as the factor is used more and more. Choice E is also incorrect because the neoclassical growth model does not make any direct predictions about changes in the material standard of living.

The Neoclassical Growth Model Assumes That,with a Given State of Technology,increases