considering the following production function Y=AK^.5L^.5 where A is a constant representing tech. under the assumption...

considering the following production function Y=AK^.5L^.5 where A is a constant representing tech. under the assumption of neoclassical model, if there is a rise in A with no changes to supply, labor, or captial, this will make the real wage (not change, rise, or fall) and real rental rate of capitlal (not change, rise, or fall)

Expert Solution

Both real wage and real rent will increase because an increase in A will increase both marginal productivity of labor and capital.

MPL= A(L/K)^0.5 and MPK= A(L/K)^.5 . thus an increase in A leads to an increase(rise) in both wage and rental rate of capital.

Rahul Sunny answered 2 years ago

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