Question

Diminishing returns to physical capital implies that, when human capital per worker and the state of technology remain fixed, each successive increase in physical capital leads to:

a. a smaller increase in productivity.
b. a larger increase in productivity.
c. a decrease in productivity.
d. negative productivity.
e. zero productivity.

Answer 1

Each additional unit of physical capital results in a smaller increase in productivity due to the law of diminishing returns, particularly when human capital and technology remain constant.

Step-by-step explanation:

Diminishing returns to physical capital imply that, in the presence of fixed human capital and unchanged technology, each additional increment of physical capital will result in a smaller increase in productivity. This concept reflects a fundamental principle known as the law of diminishing returns, which is a pivotal component of production theory in economics. As a business or nation invests more in physical capital, such as machinery and buildings, without enhancing technology or worker skills (human capital), the productivity gains from each subsequent investment tend to decline.

For example, equipping a factory with an initial set of machinery may significantly boost output, but adding more machines beyond a certain point leads to diminishing marginal returns, as there's only so much improvement in production that can be achieved without other complementary improvements. As such, capital deepening has its limits, especially in high-income countries where physical and human capital levels are already high, and further gains require technological innovation to shift the production function curve upwards.