In the Cobb-Douglas production function, one of the conclusions reached is that the lower the level of income, the higher is the MPK. This is possible because of which of the following?
A) There are increasing returns.
B) The productivity levels are different.
C) There are diminishing returns.
D) There are constant returns.

Question

Quizplus · Accepted Answer

The Cobb-Douglas production function assumes that there are diminishing returns to capital, which means that as more units of capital are added, the additional output produced by each additional unit of capital will decrease. As income levels increase, firms are able to invest in more capital, which means that the MPK (marginal product of capital) will decrease. However, at lower income levels, firms have less capital and may be operating below their optimal level of capital, which means that adding more capital will result in a higher MPK. Therefore, the conclusion that the lower the level of income, the higher is the MPK is due to diminishing returns.

In the Cobb-Douglas Production Function, One of the Conclusions Reached