The endogenous growth model's assumption of constant returns to capital is more plausible if capital is defined to include:
A) plant and equipment.
B) knowledge.
C) depreciation.
D) technology.

Question

Quizplus · Accepted Answer

Including knowledge as a part of capital in the endogenous growth model can help explain the sustained growth in productivity and living standards that we observe in reality. This is because knowledge is a non-rival and non-excludable form of capital that can be accumulated without diminishing its value, and can be shared and built upon by others. Therefore, assuming constant returns to capital in the presence of knowledge accumulation is more plausible than assuming constant returns to only physical capital like plant and equipment, which can suffer from diminishing marginal returns and depreciation.

The Endogenous Growth Model's Assumption of Constant Returns to Capital