Question

1. What is the opportunity cost of investing in capital?

a) The loss of consumption that results from redirecting resources toward investment

b) Higher taxes

c) Improved technology that leads to faster growth

2. True or False: If the extra output produced from an additional unit of capital falls as the stock of capital rises, the country is possibly overinvesting in capital.

3. What is the opportunity cost of investing in human capital?

a) Lower taxes

b) Improved technology that leads to faster growth

c) The goods or resources that could be produced if not investing in human capital

4. True or False: A country is possibly overinvesting in human capital if the best job a Ph.D. in philosophy can find is managing a restaurant.

Answer 1

1. Option A.

Investment in capital can sometimes lead to opportunity costs.

These costs arise when all the resources are redirected towards investment.

When this is done there is a loss of consumption due to the fall in value of the assets.

2. True.

If the extra output which is produced from an additional unit of capital falls when the stock of capital rises, we can say that the country is possibly overinvesting in capital.

This is called the diminishing returns to capital.

When investment increases, at one point of point capital stock also increases but it starts to
Fall when country over invests in human capital.

3. Option C.

Investment in human capital improves the nation's productivity and growth.

But it can also lead to some opportunity costs when it is over invested.

The main opportunity cost of investing in human capital is that, other goods or resources could not be produced if all the assets were used in the investment of human capital.

4. False.

Over investment in capital means directing all the resources towards any one particular problem.

Here in this question it is given that the best job a Ph.D in philosophy can find is managing a restaurant.

This indeed does not show that the country is overinvesting in human capital.