As the amount of capital per labor increases in a country year after year, each addition to capital per worker increases labor productivity by less than the previous addition. This is due to the phenomenon of:

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In this question, we’re examining what happens when the amount of capital per worker grows year after year and each additional unit of capital yields a smaller increase in output than the previous one.
Option 1: Scarcity of capital. This would imply a lack of capital overall, which would constrain production but does not specifically explain why the incremental contribution of each extra unit of capital falls over time. It’s more about the absolute quantity of capital, not the diminishing incremental productivity.
Option 2: Scarcity of labor. Limited labor would affect total output, but it does not address why the productivity gain from each extra capital unit declines as capital deepens. The issue here is not the availability of labor, but the changing marginal effect of capital as you accumulate more of it.
Option 3: Scarcity of land. Land scarcity can influence returns in an economy, especially in agriculture or natural-resource sectors, but the described pattern—successive additions to capital per worker generating progressively smaller output increases—speaks to capital’s marginal productivity, not land scarcity specifically.
Option 4: Diminishing returns. This is the core concept: as you add more capital per worker, the additional output from each new unit of capital tends to fall because other factors (like technology, skilled labor, or usable land) become the limiting resources. This explains why the marginal product of capital declines with a higher capital-labor ratio.
Option 5: Waste and inefficiency in production. While waste can reduce overall efficiency, it does not inherently explain why the incremental impact of each extra unit of capital decreases. The diminishing marginal product is a standard economic explanation for this phenomenon, separate from inefficiency concerns.
Thus, the statement best matches the concept of diminishing returns, which characterizes how incremental capital deepening yields smaller and smaller output gains over time.

ECN 001B B01-B04 FQ 2025 Final Examination

As the amount of capital per labor increases in a country year after year, each addition to capital per worker increases labor productivity by less than the previous addition. This is due to the phenomenon of:

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