The following figure shows the production function and the relationship between investment and physical capital stock for a given saving rate.

-Refer to the figure above. If the physical capital stock is fixed at $300, the total consumption in this economy will equal ________.

Question

The following figure shows the production function and the relationship between investment and physical capital stock for a given saving rate.
 
-Refer to the figure above. If the physical capital stock is fixed at $300, the total consumption in this economy will equal ________.

Quizplus · Accepted Answer

The correct answer is A because the total consumption in this economy is equal to the total output minus the total investment. The total output is equal to the physical capital stock times the marginal product of capital, which is $300 x $10 = $3,000. The total investment is equal to the physical capital stock minus the depreciation, which is $300 - $100 = $200. Therefore, the total consumption is equal to $3,000 - $200 = $2,000.

The Following Figure Shows the Production Function and the Relationship