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Chapter 7: Problem 11

Would you expect capital deepening to result in diminished returns? Why or why not? Would you expect improvements in technology to result in diminished returns? Why or why not?

Short Answer

Expert verified
In summary, capital deepening can result in diminished returns in the long run as efficiency gains from adding more capital to the production process eventually decrease. On the other hand, improvements in technology are not expected to result in diminished returns, as they can enhance overall productivity and efficiency without being inherently limited by the law of diminishing marginal returns. The impact of technology improvements on returns may depend on the specific technology and industry.

Step by step solution

01

Understanding capital deepening

Capital deepening occurs when the capital-to-labor ratio increases. This can happen, for example, when a company invests in new machinery or equipment, leading to an increase in the capital stock per worker. Capital deepening is one of the ways to increase the productivity and efficiency of the production process.
02

Impact of capital deepening on returns

As capital deepening increases, it may initially lead to increased returns, as workers are able to produce more output using the additional capital. However, as more and more capital is added, the returns might diminish. This is because, at some point, the additional capital may not be utilized as effectively, as the efficiency gains from adding more capital might start to decrease while other factors, such as the ability of workers to handle additional capital, remain constant.
03

Conclusion on capital deepening and diminished returns

Thus, it is expected that capital deepening can result in diminished returns in the long run, as the efficiency gains from adding more capital to the production process eventually decrease. #Question 2: Technology improvements and diminished returns#
04

Understanding technology improvements

Improvements in technology refer to the development or enhancement of new technologies that improve the productivity and efficiency of the production process. This can include innovation in machinery, equipment, techniques, or processes that allow workers to produce more output with the same or fewer inputs.
05

Impact of technology improvements on returns

Unlike capital deepening, technology improvements can lead to increased returns without diminishing marginal returns. This is because improvements in technology have the potential to enhance the productivity of both capital and labor inputs, and this increased productivity is not inherently limited by the law of diminishing marginal returns. However, it is crucial to note that the relationship between technology improvements and returns might depend on the specific technology and industry.
06

Conclusion on technology improvements and diminished returns

In conclusion, improvements in technology are not expected to result in diminished returns, as they have the potential to enhance the overall productivity and efficiency of the production process without being inherently limited by the law of diminishing marginal returns. However, the impact on returns might be influenced by the specific technology and industry.

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Most popular questions from this chapter

An economy starts off with a GDP per capita of \$5,000. How large will the GDP per capita be if it grows at an annual rate of \(2 \%\) for 20 years? \(2 \%\) for 40 years? \(4 \%\) for 40 years? \(6 \%\) for 40 years?

Over the past 50 years, many countries have experienced an annual growth rate in real GDP per capita greater than that of the United States. Some examples are China, Japan, South Korea, and Taiwan. Does that mean the United States is regressing relative to other countries? Does that mean these countries will eventually overtake the United States in terms of the growth rate of real GDP per capita? Explain.

Labor Productivity and Economic Growth outlined the logic of how increased productivity is associated with increased wages. Detail a situation where this is not the case and explain why it is not.

An economy starts off with a GDP per capita of 12,000 euros. How large will the GDP per capita be if it grows at an annual rate of \(3 \%\) for 10 years? \(3 \%\) for 30 years? \(6 \%\) for 30 years?

Assume there are two countries: South Korea and the United States. South Korea grows at 4\% and the United States grows at \(1 \% .\) For the sake of simplicity, assume they both start from the same fictional income level, \(\$ 10,000\). What will the incomes of the United States and South Korea be in 20 years? By how many multiples will each country's income grow in 20 years?
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