If the depreciation and saving rates are constant, the economy eventually will settle in the steady state in the Solow model because of:
A) the lack of productivity
B) increasing returns to capital in production
C) constant returns to capital in production
D) diminishing returns to capital in production
E) increasing returns to labor in production

Question

Quizplus · Accepted Answer

In the Solow model, the production function exhibits diminishing returns to capital, which means that as the stock of capital per worker increases, the additional output generated by each additional unit of capital decreases. Therefore, as the economy approaches the steady state, the rate of capital accumulation slows down and eventually stops because the marginal product of capital falls to the level of the depreciation rate, which represents the rate at which the capital stock deteriorates over time. At this point, the economy is in a long-run equilibrium where the capital stock per worker, output per worker, consumption per worker, and savings rate are all constant. Therefore, the correct answer is D: diminishing returns to capital in production.

If the Depreciation and Saving Rates Are Constant, the Economy