If Galaxia has a GDP that is 10 times larger than Myopia, which country would likely have greater marginal returns to capital based on the law of diminishing returns to capital?

a. Galaxia

b. Myopia

c. Both countries would have equal marginal returns to capital.

d. Both countries would have marginal returns to capital = 0 due to diminishing returns.

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25 October, 07:12

If Galaxia has a GDP that is 10 times larger than Myopia, which country would likely have greater marginal returns to capital based on the law of diminishing returns to capital?

a. Galaxia

b. Myopia

c. Both countries would have equal marginal returns to capital.

d. Both countries would have marginal returns to capital = 0 due to diminishing returns.

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Answers (1)

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Leland Fowler · Answer 1

b. Myopia

Explanation:

As the capitalization rate on Galaxia is greater than in Myopia we should consider, ceteris paribus, than an additional unit of capital in Myopia will increase the output in a larger proportion than a single unit of capital in Galaxia.

Of course, there could be factors which makes Myopia investment yield below Galaxia (autoritarian goverment who confiscate the private property will make the increase equal to zero as it will be consiscated as soon you added.

But, only assuming the law of diminishing return the capital invested in Mypia should return greater amoutn than in Galaxia