The curve below shows the relationship between real GDP per worker and physical

Question

The curve below shows the relationship between real GDP per worker and physical capital per worker in a given economy. Use the graph to answer the questions that follow. How much will real GDP per worker increase if physical capital per worker increases from $20,000 to $40,000? How much will real GDP per worker increase if physical capital per worker increases from $40,000 to $60,000? What does this graph demonstrate about the relationship between real GDP per worker and physical capital per worker? There are diminishing returns to investment in physical capital. The optimal level of capital per capita is $60,000. Increasing capital leads to a constant increase in real GDP.

Explanation / Answer

Real GDP per worker at $20,000 = 25000

Real GDP per worker at $40,000 = 40000

Difference = 40000 - 25000 = 15000 (Answer 1)

Real GDP per worker at $60,000 = 45000

Difference = 45000 - 40000 = 5000 (Answer 2)

There is a diminishing returns to investment in physical capital (Option 1)

This is because, with the same increase in investment, there is lesser increase in Real GDP at higher levels as compared to lower levels.

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