For this question,assume that there are decreasing returns to capital,decreasing returns to labor,and constant returns to scale.A reduction in the capital stock will cause which of the following?
A)a reduction in output
B)no change in output
C)an increase in output per capita
D)increase the capital-labor ratio
E) none of the above

Question

Quizplus · Accepted Answer

Assuming decreasing returns to capital and labor, a reduction in capital stock will result in a decrease in output as there will be a shortage of capital relative to labor. Constant returns to scale imply that proportional changes in inputs lead to the same proportional change in output; hence a reduction in capital stock will lead to a proportional decrease in output. The increase in output per capita or the capital-labor ratio depends on the changes in labor supply and population, respectively, which are not stated in the question.

For This Question,assume That There Are Decreasing Returns to Capital,decreasing