Question 1

All else equal, if there are diminishing returns and constant returns to scale, then what happens to productivity if capital and labor both increase but capital increases by more?

Accepted Answer

If there are diminishing returns and constant returns to scale, then increasing both capital and labor will eventually lead to lower productivity gains. However, if capital increases more than labor, this may shift the production function to a higher level of output, leading to an increase in productivity. Therefore, productivity will increase if capital increases by more than labor.

Question 2

If a country's saving rate increases, then in the long run

Accepted Answer

A higher saving rate in a country means that more resources are being directed towards investment, which leads to an increase in productivity. This increase in productivity will, in turn, lead to an increase in real GDP per person, as more goods and services can be produced with the same amount of resources. Therefore, both productivity and real GDP per person will be higher in the long run with an increase in saving rate.

Question 3

Country A and country B both increase their capital stock by one unit. Output in country A increases by 10 while output in country B increases by 8. Other things the same, diminishing returns implies that country A is

Accepted Answer

Diminishing returns implies that as more units of input are added, the marginal product of each additional unit decreases. Therefore, if Country A adds another unit of capital, the increase in output will be less than the initial gain of 10 units, as they have already experienced some degree of diminishing returns. Thus, it is likely that Country B will eventually surpass Country A in terms of output per unit of capital.

Question 4

Figure 25-1.
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 25-1. The shape of the curve is consistent with which of the following statements about the economy to which the curve applies?

Accepted Answer

The shape of the curve is consistent with diminishing returns to capital, indicating that as the amount of capital per worker increases, the additional output gained from an additional unit of capital becomes smaller. This corresponds to statement C. The other statements are not directly related to the shape of the curve.

Question 5

All else equal, if there are diminishing returns, then what happens to productivity if both capital and labor increase?

Accepted Answer

Diminishing returns mean that after a certain point, adding more units of input (capital or labor) will lead to smaller and smaller increases in output. Therefore, it is not necessarily true that productivity will definitely rise, fall or remain unchanged if both capital and labor increase. The impact on productivity will depend on the specific stage of production and the level of inputs already in use.

Question 6

All else equal, if there are diminishing returns, then if a country raised its capital by 100 units last year and by 100 units this year,

Accepted Answer

If there are diminishing returns, then the increase in output will be greater when the capital is increased by a smaller amount. Since the increase in capital is the same for both years (100 units), the increase in output will be greater in the first year when the country's capital was lower. Therefore, the increase in output was greater last year than this year.

Question 7

Other things the same, a country that increases its saving rate increases

Accepted Answer

Increasing saving rate means more investment in physical and human capital, which increases productivity and future real GDP. Thus, A is the best choice.

Question 8

Figure 25-1.
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 25-1. The curve becomes flatter as the amount of capital per worker increases because of

Accepted Answer

The curve becomes flatter as the amount of capital per worker increases due to diminishing returns to capital. This means that each additional unit of capital per worker will result in a smaller increase in output per worker, eventually leading to a saturation point where further increases in capital will not result in any additional growth in output.

Question 9

According to the traditional view of the production function, which of the following values of the additions to output per worker would be consistent with moving from 5 to 6, and then from 6 to 7, and then from 7 to 8 units of capital per worker in that order?

Accepted Answer

According to the traditional view of the production function, as capital per worker increases, the additions to output per worker will eventually decrease due to diminishing marginal returns. Therefore, moving from 5 to 6 units of capital per worker would result in an addition of 40 units of output per worker (assuming constant returns to scale). Moving from 6 to 7 units of capital per worker would result in a smaller addition to output per worker, given diminishing marginal returns. Therefore, the addition to output per worker would be 34 units. Moving from 7 to 8 units of capital per worker would result in an even smaller addition to output per worker, given further diminishing marginal returns. Therefore, the addition to output per worker would be 32 units. Choice C is the only option that includes these values.

Question 10

Country A and country B are the same except country A currently has more capital. Assuming diminishing returns, if both countries increase their capital by 100 units and other factors that determine output are unchanged, then

Accepted Answer

Due to diminishing returns, the increase in output resulting from an increase in capital will be less than the previous increase in output at higher levels of capital. Therefore, country A will experience less of an increase in output compared to country B because it already has more capital.

Question 11

The traditional view of the production process is that capital is subject to

Accepted Answer

The traditional view of the production process is that capital is subject to diminishing returns. This means that as more units of capital are added to the production process, the marginal product of each additional unit of capital decreases.

Question 12

The slope of the production function with capital per worker on the horizontal axis and output per worker on the vertical axis

Accepted Answer

The answer of The slope of the production function with...

Question 13

Country A and country B both increase their capital stock by one unit. Output in country A increases by 12 while output in country B increases by 15. Other things the same, diminishing returns implies that country A is

Accepted Answer

Diminishing returns suggests that as more units of capital are added, the increase in output will begin to slow down. Since country A saw a smaller increase in output than country B when increasing their capital stock by one unit, this implies that they are already closer to their maximum potential output with their current level of capital. Therefore, if they were to add another unit of capital, the increase in output would be less than 12 units, whereas in country B, the increase in output would still be larger than 15 if they added another unit of capital.

Question 14

Figure 25-1.
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 25-1. The shape of the curve is consistent with which of the following statements about the economy to which the curve applies?

Accepted Answer

The answer of Figure 25-1.
On the horizontal axis, K/L represents...

Question 15

All else equal, if there are diminishing returns, then which of the following is true if a country increases its capital by one unit?

Accepted Answer

Diminishing returns imply that each additional unit of capital added will result in a smaller increase in output than the previous unit. This means that output will still rise, but by a smaller amount than before. Therefore, option B is the correct choice.

Question 16

Figure 25-1.
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 25-1. Choose a point anywhere on the curve and call it point A. If the economy is at point A in 2011, then it will definitely remain at point A in 2012 if, between 2011 and 2012,

Accepted Answer

The answer of Figure 25-1.
On the horizontal axis, K/L represents...

Question 17

"When workers have a relatively small quantity of capital to use in producing goods and services, giving them an additional unit of capital increases their productivity by a relatively large amount." This statement

Accepted Answer

The statement is consistent with the view that capital is subject to diminishing returns because it suggests that as workers have relatively small quantities of capital, each additional unit of capital increases productivity by a relatively large amount. This implies that as more and more units of capital are added, the increase in productivity from each additional unit decreases, which is the concept of diminishing returns. The statement is not necessarily an assertion that production functions have the property of constant returns to scale nor does it provide any information about the ease or difficulty of a country's economic growth.

Question 18

Other things the same, a country that increases its savings rate will have

Accepted Answer

Increasing the savings rate leads to more investment in capital, which can lead to higher future real GDP per person through increased productivity and output. Therefore, both higher future capital and higher future real GDP per person are likely outcomes.

Question 19

On a production function, as capital per worker increases, output per worker

Accepted Answer

The answer of On a production function, as capital per...

Question 20

If there are diminishing returns to capital, then

Accepted Answer

The answer of If there are diminishing returns to capital,...

Quiz 7: Production and Growth