The curve below shows the relationship between real GDP per

The curve below shows the relationship between real GDP per worker and physical capital per worker in a given economy. Use the graph to answer the questions that follow. What does this graph demonstrate about the relationship between real GDP per worker and physical capital per worker?

Solution

1. When physical capital per worker increases from $20,000 to $40,000 then, Real GDP increases from 25,000 to 40,000. therefore, increase in real GDP is 15,000 (40,000 - 25,000)

2. When physical capital per worker increases from $40,000 to $60,000 then, Real GDP increases from 40,000 to 45,000. therefore, increase in real GDP is 5,000 (45,000 - 40,000)

3. There are diminishing returns to investment in physical capital