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)

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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 1 year ago

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