Question

Alpha has $40,000 of capital per worker, while Beta has $5,000 of capital per worker. In all other respects, the two countries are the same. According to the principle of diminishing returns to capital, an additional unit of capital will increase output ______ in Alpha compared to Beta, holding other factors constant.
a) more
b) less
c) not at all
d) by the same amount

Answer 1

Answer:

b) less

Explanation:

Adding 1,000 capital to Alpha will represnet 1,000/40,000 = 2.5% increase

while adding  to Beta will represent 1,000/5,000 = 20% increase

Is important when doing real-life analysis the asusmption we made: holding other factors constant and that in all other respects the two countries are the same, as in real life there are cultural, religion, politics, natural resource and even geography that makes the analysis differ.