In a small European country, it is estimated that changing the level of capital from $8 million to $10 million will increase real GDP from $2 million to $3 million.What level of GDP would you expect the economy to be able to reach if spending on capital continued to rise to $12 million, assuming no technological change and no change in the hours of work?
A)GDP would increase further, but by less than $1 million.
B)GDP would increase further by exactly $1 million.
C)GDP would increase further by more than $1 million.
D)GDP would increase further by exactly $4 million.
E)GDP would increase further, but more than $4 million.

Question

Quizplus · Accepted Answer

Based on the given information, increasing capital from $8 million to $10 million increased real GDP by $1 million ($2 million to $3 million). Therefore, we can assume that increasing capital from $10 million to $12 million would also increase real GDP, but by a smaller amount than before since the marginal benefit of capital will decrease. So, GDP would increase further, but by less than $1 million.

In a Small European Country, It Is Estimated That Changing