Suppose that an increase in capital per hour worked from $15,000 to $20,000 increases real gdp per hour worked by $500. if capital per hour worked increases further to $25,000, by how much would you expect real gdp per hour worked to increase if there are diminishing returns?
a. by exactly $500
b. by less than $500
c. by more than $500 but less than $5,000
d. by more than $5,000 but less than $20,000

B

Explanation:

If GDP increased $500 when the capital per hour increased $5,000, then if  the capital per hour increases another $5,000, GDP should increase in $500 more. But the capital productivity has diminishing returns, which means that the increase in marginal productivity decreases as the capital per hour grows.

For example, if the capital per hour is $1,000 and there is an increase in one unit of it ($1,001), the GDP first will increase 0,3 units, if there is another increase in one unit ($1,002), GDP will increase in 0,29 units, if there is an increase in another unit ($1,003) GDP will increase in 0,28 units, and so on.  Notice that GDP still increases but in a lower rate.

In this case, the first increase of the capital per hour of $5,000 produced an increase in $500 in the GDP, but because each extra unit will increase less the GDP, we can expect that another increase in capital per hour of $5,000 will traduce in an increase by less than $500 in the GDP.

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