Assume that there are decreasing returns to capital, decreasing returns to labour, and constant returns to scale. An increase in the capital stock will cause which of the following?
A) Decrease the capital- labour ratio.
B) An increase in output per capita.
C) No change in output.
D) Output to increase, but by more and more as the capital stock increases.
E) A decrease in output.

Question

Quizplus · Accepted Answer

Since there are decreasing returns to both capital and labour, an increase in the capital stock will have a diminishing effect on output. However, since there are constant returns to scale, output per capita will increase as the capital stock increases. This means that each worker will have access to more capital, leading to an increase in their productivity and thus a higher output per capita.

Assume That There Are Decreasing Returns to Capital, Decreasing Returns