Country A and country B are the same except country A currently has more capital. Assuming diminishing returns, if both countries increase their capital by 100 units and other factors that determine output are unchanged, then a. output in country A increases by more than in country B. b. output in country A increases by the same amount as in country B. c. output in country A increases by less than in country B. d. None of the above is necessarily correct.

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Business

Virginia Thompson

14 December, 03:32

Country A and country B are the same except country A currently has more capital. Assuming diminishing returns, if both countries increase their capital by 100 units and other factors that determine output are unchanged, then a. output in country A increases by more than in country B. b. output in country A increases by the same amount as in country B. c. output in country A increases by less than in country B. d. None of the above is necessarily correct.

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Alyssa Guzman · Answer 1

The correct answer is option c.

Explanation:

Country A and country B are the same. But country A has more capital than country B. Both the countries increase their capital by 100 units while other factors are constant.

This increase in capital will cause the output of country B to increase more than output in country A. This happens because of the law of diminishing marginal returns.

Law of diminishing marginal returns states that as the number of inputs employed the return from each input goes on declining. As country A possesses more capital, the return from the capital will be fewer. So the increase in output will also be relatively less.