Question

Explain why the marginal product of capital diminishes as more and more capital is used.

Briefly describe the market for loanable funds. Be sure to indicate who participates in this market and what outcomes are determined in the market.

Answer 1

1. marginal product of capital diminishes as more and more capital is used. as we increase the more capital for production in terms of machinery but there is not enough employees to work with the extra machines, so the value of output come to the firms diminishes with every increase in capital. it means that firm is not able to increase the labor to be accommodated with rising capital to increase the output. this is the reason when more capital will produce less output.

2.. The market for loanable funds describes borrowing the fund market . The supply of loanable funds is based on savings and the demand is based on borrowing. The interaction between the supply of savings and the demand for loans determines equilibrium rate of interest and according to this scenario it is decided that how much the firm will take loan and how much household to be motivate to saving. household and firm participate to give and take the fund in terms of saving and borrowing and outcome will be in terms of interest rate according fund exchange would take place in the market for loanable fund.