Figure 7-1. On the horizontal axis, K/L represents capital (K) per worker (L). On the vertical axis, Y/L represents output (Y) per worker (L).

-Refer to Figure 7-1. The shape of the curve is consistent with which of the following statements about the economy to which the curve applies?
A) In the long run, a higher saving rate leads to a higher growth rate of productivity.
B) In the long run, a higher saving rate leads to a higher growth rate of income.
C) Returns to capital become increasingly smaller as the amount of capital per worker increases.
D) All of the above are correct.

Question

Figure 7-1. On the horizontal axis, K/L represents capital (K) per worker (L). On the vertical axis, Y/L represents output (Y) per worker (L).
 
-Refer to Figure 7-1. The shape of the curve is consistent with which of the following statements about the economy to which the curve applies?
A) In the long run, a higher saving rate leads to a higher growth rate of productivity. 
B) In the long run, a higher saving rate leads to a higher growth rate of income. 
C) Returns to capital become increasingly smaller as the amount of capital per worker increases. 
D) All of the above are correct.

Quizplus · Accepted Answer

The shape of the curve shows diminishing returns to capital, which means that as the amount of capital per worker increases, the marginal product of capital decreases. This implies that there is a limit to how much output can be produced with additional capital, leading to diminishing returns. This is consistent with statement C, which is correct. Statements A and B are incorrect because the curve does not show a direct relationship between savings and growth rates, but rather the effects of increasing capital on productivity and output.