If there are diminishing returns to capital, then a. capital produces fewer goods as it ages. b. old ideas are not as useful as new ones. c. increases in the capital stock eventually decrease output. d. increases in the capital stock increase output by ever smaller amounts.

Question

Natalia Ross

Business

5 November, 09:21

If there are diminishing returns to capital, then a. capital produces fewer goods as it ages. b. old ideas are not as useful as new ones. c. increases in the capital stock eventually decrease output. d. increases in the capital stock increase output by ever smaller amounts.

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Answers (1)

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Alonzo Erickson · Answer 1

The correct answer is d. increases in the capital stock increase output by ever smaller amounts.

Explanation:

It is necessary to explain the basic concept of diminishing marginal returns. If we increase the quantity of a productive factor and leave the amount used of the rest fixed, there will come a time when the quantity of final product we obtain is less as we produce more and more. There may even come a time when, by increasing a unit of factor employed (for example, work or machinery), production decreases.

Explained in simple words, it seems that despite what may be thought a priori, increasing a factor not only does not increase the production of the good or service but can lead to a gradual decrease in the amount produced.

It is necessary to differentiate this process from what happens in diseconomies of scale, the opposite case of economies of scale. In these, the decreases in the increases in production are a consequence of the increase of all the factors in the same proportion and not of only one of them, as in the case of diminishing marginal yields.