Question

Suppose that a 10 percent increase in the physical capital stock increases GDP by 10 percent. Nowconsider an additional 10 percent increase in the physical capital stock.This increase in the physical capital stock will increase GDP by_________A. More than 10%B. less than 10%C. 10%

Answer 1

B. Less than 10%

Step-by-step explanation:

An addition increase by 10 % in the physical capital stock (which is a factor of production consisting of man made goods like machineries and so on) will lead to a less than 10% increase in the Gross domestic product. This is due to the law of diminishing marginal utility which talks about the consumption increases marginal utility from each additional unit declines. Thus, the more the physical capital stock increases, the GDP will increase at a decreasing rate.