Answer to Question #65403 in Microeconomics for pva
an economy. What is the significance of decreasing returns in the Solow model?
It means a situation when the diminishing returns to factor kick in to an extent and the economy will not become more productive in per capita through simply adding more capital. The conditions for steady state in an economy are the following ones:
1. Growth of labour force at a constant proportional rate.
2. Prevailing of full employment at all times.
3. Constant saving-income ratio
4. Fixed coefficients of productions. Lack of possibility of the substitution of labour and capital.
5. Lack of technical change.
The economy will become in a steady state when there are diminishing returns on the investment curve.
As capital increases, diminishing returns influence that investment and production increase by less and less, though depreciation increases by the same amount. But the main fact is that net investment is zero that’s why the economy is in steady state.
Need a fast expert's response?Submit order
and get a quick answer at the best price
for any assignment or question with DETAILED EXPLANATIONS!