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      Question

      The AK endogenous growth model (Y = AK) avoids the

      diminishing returns problem of the Solow model by:
      A Assuming human capital accumulation offsets physical capital diminishing returns through externalities, so social return to capital is constant Correct Answer Incorrect Answer
      B Incorporating R&D expenditure that generates new varieties of capital goods, preventing marginal product from falling Correct Answer Incorrect Answer
      C Interpreting K broadly to include both physical and human capital, or incorporating capital externalities (learning-by-doing) such that the social MPK remains constant (= A), generating perpetual growth without convergence Correct Answer Incorrect Answer
      D Assuming a fixed saving rate that exactly offsets depreciation, maintaining a constant capital-output ratio indefinitely Correct Answer Incorrect Answer

      Solution

      AK model: When K is interpreted broadly (including human capital) or when learning-by-doing externalities are present (Arrow, Romer), the social MPK does not diminish ā€” it remains constant at A. This generates perpetual growth: g = sA āˆ’ Ī“. There is no steady state and no convergence (unlike Solow). Option (A) is closer to Lucas (1988) but incomplete. Option (B) describes Romer (1990) with expanding product varieties ā€” a different endogenous growth model. Note: Assertion-reason trap (from exam Q34 in PDF): ā€œAll endogenous growth models attribute growth to human capital/R&Dā€ ā€” FALSE. The AK model does not require R&D; it relies on broad capital or externalities. Different endogenous models have different engines of growth.

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