Question

Suppose that an increase in capital per hour worked from $15,000 to $20,000 increases real GDP per hour worked by $500. If capital per hour worked increases further to $25,000, by how much would you expect real GDP per hour worked to increase if there are diminishing returns?

Answer 1

An increase in capital per hour worked from $20,000 to $25,000 is expected to result in an increase in real GDP per hour worked that is less than $500, due to the economic principle of diminishing returns.

Step-by-step explanation:

The subject of the question is related to the economic concept of diminishing returns in the context of rising capital per hour worked and its effect on real GDP per hour worked. The scenario provided is an example of how increasing capital investment per worker leads to increased productivity, but with diminishing benefits as investment continues to rise. According to the principle of diminishing returns, the increase in real GDP per hour worked would be less than $500 when the capital per hour worked increases from $20,000 to $25,000.

Since an increase in capital from $15,000 to $20,000 led to an increase of $500 in real GDP per hour worked, under the law of diminishing returns, the next $5,000 increase will result in a smaller increment in GDP per hour worked. Therefore, if capital per hour worked increases from $20,000 to $25,000, we would expect the increase in real GDP per hour worked to be less than $500. This is because, as more capital is added, each additional unit of capital will tend to produce less additional output.

Answer 2

The real GDP per hour worked to increase if there are diminishing returns by less than $500.

Step-by-step explanation:

Increase in capital per worker from $15000 to $ 20000 increases real GDP per hour worked by $ 500. If there is diminising return to scale then any amount of further increase in capital per worker (say further to 25000 ) will increase GDP less than $ 500. This is because diminising return implies that as we increase our inputs the quantity of our output goes on diminishing. Here the diminishing return has already started ,therefore addtional unit of output will only decrease due to increase in additional unit of input.

Therefore, The real GDP per hour worked to increase if there are diminishing returns by less than $500.