Country A has a smaller stock of capital than Country B, but the supply of labor in both countries is equal. What does this imply?
A) The increase in output due to the use of an additional unit of capital will be smaller in Country A than in Country B.
B) The increase in output due to the use of an additional unit of capital will be larger in Country A than in Country B.
C) The use of an additional unit of capital will increase output in Country A only if there is an increase in the total efficiency units of labor.
D) The use of an additional unit of capital will increase output in Country B only if there is an increase in the total efficiency units of labor.

Question

Quizplus · Accepted Answer

The law of diminishing returns suggests that in a country with a smaller stock of capital (Country A), the marginal product of capital (the increase in output from an additional unit of capital) is higher than in a country with a larger stock of capital (Country B). This is because each additional unit of capital has more impact when the existing capital stock is low.

Country a Has a Smaller Stock of Capital Than Country