capital deepening schweser exam vol.2

CFA Level II
#1

I don’t understand the answer Schweser is giving and would like someone to give an opinion on that.

Practice exam 2 (morning) question 7:

Countries: Procken (developing) alpha 32.5%, Krosse (developing) 35%, and Weira (developed) 25%.

Question: Which country is most likely to benefit from capital deepening?

My answer: Procken

Schweser answer: Krosse, a nation with a highest alpha among all the countries. A high value of alpha indicates that the next unit of capital added will increase output almost as much as the previous unit of capital.

That’s completely the opposite of what curriculum says: country with high alpha has less marginal benefit from extra unit of capital and will finally reach the steady state as the capital will reach certain level.

I am very confused with their answer.

Thank you

#2

Anyone know the answer to this one? I also answered Procken as it is EM country with highest alpha? Understand Krosse as the answer if explanation said that it had the lowest capital base per person, but it doesn’t.

#3

Yes a country having higher alpha will benefit from more capital. A country where alpha =1 means there are no diminishing marginal returns to scale where as 0 means there are. So a higher alpha means the country benefits from capital deepening. 1-a is high means labour has more effect rather than capital