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Calculation of Decreasing Return to Scale - Assignment Example

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In the paper “Calculation of Decreasing Return to Scale” the author discusses a concept in economics to describe the rise in output as a result of an increase in inputs. This is useful when seeking efficient production or maximizing profits by lowering production costs…
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Calculation of Decreasing Return to Scale

Download file to see previous pages... Assume that K=5 and L=4, therefore, F (K, L) =K+L²=5+ (4)²=21. Supposing that K is increased by one unit and L is reduced by 1 unit, such that the new K=6 and the new L=3. The new output will be; F (K, L) =K+L²=6+ (3)²= 15 units. The rate of growth increases upward starting from point M up to a stable state point b where it remains constant and starts declining slowly towards the Right (Jones, pp.165).
c).     If A grew at a constant rate, GDP will consequently grow because as one of the input is increased, GDP increases.
d). Consumption reduces savings and investment, therefore, if TFP increases economy will grow. 
 5). a). If investment rates double, GDP per capital would also double because investment has a proportional impact on GDP per capita.
 6). a).At steady state, capital stock and depreciation are offset. Dk=0
i = sy = s f (k)
Where i=investment, and =depreciation (Jones, pp.175-180)
Dk =s* f (k) – dk
At steady state=2648billions-8%×2648billion
The steady state capital stock for the economy=$2436.16
b). 2648billions-20%×2648billion=$2118.4
c). Dk =s* f (k) – dk
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