Finally, consider if this increase in investment as a result of government policy might have afurther effect on long-term growth. Assume that this investment is used completely on capitalaccumulation – i.e. increasing the capital stock in the economy.Suppose that the production function in this economy instead exhibits both (i) increasingreturns and (ii) constant returns to scale, as in lecture.4. Notice that the production function of this economy exhibited not diminishing returns,but rather increasing returns, which means that for each additional unit of capital(ceteris paribus), the marginal product of capital is increasing. Would this capitalaccumulation be a sustainable source of long-term growth in both GDP and GDP percapita? Why or why not? Explain your answer.

A change in wealth due to investment is known as capital accumulation. When the wealth increases due…

4. Notice that the production function of this economy exhibited not diminishing returns, but rather increasing returns, which means that for each additional unit of capital (ceteris paribus), the marginal product of capital is increasing. Would this capital accumulation be a sustainable source of long-term growth in both GDP and GDP per capita? Why or why not? Explain your answer.

4. Notice that the production function of this economy exhibited not diminishing returns, but rather increasing returns, which means that for each additional unit of capital (ceteris paribus), the marginal product of capital is increasing. Would this capital accumulation be a sustainable source of long-term growth in both GDP and GDP per capita? Why or why not? Explain your answer.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter9: Production Functions

Section: Chapter Questions

Problem 9.11P

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