All else equal,if there are diminishing returns and constant returns to scale,then what happens to productivity if capital and labor both increase but capital increases by more?
A)Productivity will definitely fall.
B)Productivity will definitely be unchanged.
C)Productivity will definitely rise.
D)None of the above are necessarily correct.

Question

Quizplus · Accepted Answer

If there are diminishing returns and constant returns to scale, then increasing both capital and labor will eventually lead to lower productivity gains. However, if capital increases more than labor, this may shift the production function to a higher level of output, leading to an increase in productivity. Therefore, productivity will increase if capital increases by more than labor.

All Else Equal,if There Are Diminishing Returns and Constant Returns