Suppose that an economy with constant returns to scale doubled its physical capital stock, doubled its available natural resources, and doubled its human capital, but kept the size of the labour force the same. How does the change in output compare to the change in productivity?
A) Output would stay the same and so would its productivity.
B) Output and productivity would increase, but by less than double.
C) Output and productivity would increase by more than double.
D) Output would increase by less than double, but productivity would double.

Question

Quizplus · Accepted Answer

According to the Solow growth model, doubling the physical capital stock, natural resources, and human capital, while holding labor constant, would result in a proportional increase in output. This means that output would double. However, productivity would not double because productivity is defined as output per unit of input. Since only the inputs have doubled, and not the labor force, the increase in productivity would be less than double. Therefore, the correct answer is B.

Suppose That an Economy with Constant Returns to Scale Doubled