The production function model showed that capital flows to poorer regions, because the marginal product of capital is higher in the poorer regions. Robert Lucas's paper showed that that was NOT true. The reason was that:
A) investors were forced to abandon higher returns in poorer countries.
B) it was assumed that production functions were the same in all countries.
C) it was assumed that production functions were different for rich and poor countries.
D) rich countries offered higher interest rates.

Question

Quizplus · Accepted Answer

Robert Lucas's paper challenged the assumption made in the production function model that production functions were the same in all countries. Instead, Lucas argued that production functions were likely to differ across countries due to differences in technology, institutions, and other factors. Therefore, capital may not flow to poorer regions simply because the marginal product of capital is higher there.

The Production Function Model Showed That Capital Flows to Poorer