Question

11) A small economy increased its capital per hour worked (K/L) from $70,000 to $85,000. As a result, real GDP per worker (Y/L) grew from $25,000 to $35,000. If the economy increases its capital per hour worked by another $15,000 to $100,000, but there is no change in technology, how will output per worker change?

a) Output per worker will fall by more than $10,000.

b) Output per worker will increase by $10,000.

c) Output per worker will fall by less than $15,000

d) Output per worker will fall by $15,000

e) Output per worker will increase by less than $15,000.

f) Output per worker will increase by more than $15,000.

Answer 1

Given that,

Increase in capital per hour worked from $70,000 to $85,000

As a result, Real GDP per worker increases from $25,000 to $35,000.

So, the real GDP grew by = $35,000 - $25,000

= $10,000

There is no change in technology.

Initially, the marginal product of capital is $10,000 because as we increase the output level, then there is a diminishing marginal returns.

Hence, the output per worker will increase by less than $10,000 because the output per worker would increase at a diminishing rate.

Correct Answer: Output per worker will increase by less than $10,000.