Explain how advances in technology are critical to sustaining economic growth, even if capital per hour worked is consistently increasing. Provide a graph of a per-worker production function to support your answer

What will be an ideal response?

As the level of capital per hour worked increases, an economy moves along the per-worker production function toward higher levels of real GDP per hour worked. However, diminishing returns imply that successive increases in capital per hour work increase real GDP per hour worked at a decreasing rate. As shown in the graph below, moving from point A to point B implies an increase in capital per hour worked. As a result, real GDP per hour worked increases from $780 to $800 (an increase of $20 ). Moving from point B to point C implies a similar increase in capital per hour worked, but real GDP per hour worked increases from $800 to $810 (an increase of only $10 ). Without technological change that shifts the per-worker production function upward, continual growth in real GDP per hour worked cannot be sustained even if capital per hour worked continues to increase.