Question

1. Diminishing returns to physical capital means that when the state of technology and human capital per worker are fixed, an increase in the amount of physical capital per worker leads to:

a smaller increase in the marginal product of labor.

a decrease in the total amount of output.

negative marginal product.

a constant amount of total output.

2. An increase in capital stock would:

shift the production function upward.

shift the production function inward.

shift the production function downward.

cause a movement to the right along a stationary production function.

cause a movement to the left along a stationary production function.

Answer 1

Question No. 1

Answer : a smaller increase in the marginal product of labor.

The physical capital are those tools, machinery, buildings, automobiles, and other things that the man or workers use in production. So physical capitals are those man-made capitals that are used for further production.

The human capital are those qualities of an individual that make a person productive and valuable for an organization and a country. The human capital is formed through education, knowledge, experience, and professional skill.

Returns to scale in production measures the returns from the factors of production when they are increased, i.e., it measures the rate at which the total output increases with the increase in the factors of production. The diminishing returns to scale means output increases at a decreasing rate than the increase in inputs. In production, when only one variable input increases and other inputs remain constant or fixed, this will result in decreasing marginal productivity of the variable factor. Here, the state of technology and human capital per worker that make a man or worker more productive remain constant, When the state of technology and human capital per worker are fixed, then the only increase in the amount of physical capital per worker will cause a smaller increase in the marginal productivity of labor(MP_L) and thus the decrease in output or diminishing returns.

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Question No. 2

Answer: shift the production function upward.

In the above diagram, we are measuring number of labors on the horizontal axis , and the total production on the vertical axis.

If there are two inputs., labor(L) and capital (K) are used in the production, then the production function would be as follows,

Y = f( L, K)

When capital is K_{1 ,} and labor employment is L₁ , the output is Y₁. Now, if the capital stock, which is one of the important factors of production,is increased from K₁ to K₂, and labor employment is same as L₁, the marginal productivity of labor will rise, and thus the total production will rise. It will shift the production function upward from Y₁ to Y_2.

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