Question

A small economy increased its capital per hour worked ( K/ L) from $40,000 to $50,000. As a result, real GDP per worker ( Y/ L) grew from $20,000 to $25,000. If the economy increases its capital per hour worked by another $10,000 to $60,000, but there is no change in technology, by how much more and in what direction will output per worker change?

Answer 1

Answer:

output per worker will increase by less than 5,000

Explanation:

Capital per hour worked increased:

From $40,000 to $50,000

Real GDP per worker grew:

From $20,000 to $25,000

Therefore,

Real GDP per worker grew by = 25,000 - 20,000

                                                   = 5,000

Initially marginal product of capital is 5,000, because as we increase output there is diminishing marginal returns, hence, the output per worker will increase by less than 5,000.