The Production Function Model Showed That Capital Flows to Poorer

question 38

Multiple Choice

The production function model showed that capital flows to poorer regions, because the marginal product of capital is higher in the poorer regions. Robert Lucas's paper showed that that was NOT true. The reason was that:

• A) investors were forced to abandon higher returns in poorer countries.
• B) it was assumed that production functions were the same in all countries.
• C) it was assumed that production functions were different for rich and poor countries.
• D) rich countries offered higher interest rates.

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