Question 15.28

14. You are hired as an economic consultant to the countries of Albernia and Brittania. Each country’s current relationship between physical capital per worker and output per worker is given by the curve labeled “Productivity1” in the accompanying diagram. Albernia is at point A and Brittania is at point B.

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  1. In the relationship depicted by the curve Productivity1, what factors are held fixed? Do these countries experience diminishing returns to physical capital per worker?

  2. Assuming that the amount of human capital per worker and the technology are held fixed in each country, can you recommend a policy to generate a doubling of real GDP per capita in Albernia?

  3. How would your policy recommendation change if the amount of human capital per worker could be changed? Assume that an increase in human capital doubles the output per worker when physical capital per worker equals $10,000. Draw a curve on the diagram that represents this policy for Albernia.