Describe the relationship between the production function,the investment function,and the capital-labour ratio.

Question

Quizplus · Accepted Answer

The Answer is Financial markets operate to ensure that the level of savings equals the level of investment.For simplicity,we assume that the economy saves a constant fraction,s,of real GDP per worker,y.So,investment per worker,i,equals sy.As the capital-labour ratio increases,real GDP per worker also increases,which causes investment per worker to increase.Due to diminishing marginal returns,increasing the capital-labour ratio causes smaller and smaller increases in real GDP per worker,so the production function becomes flatter.Because investment per worker equals the saving rate multiplied by real GDP per worker,sy,the increase in investment also gets smaller and smaller as the capital-labour ratio increases.

Describe the Relationship Between the Production Function,the Investment Function,and the Capital-Labour