A) imagine an economy with a production function of Y=100K^(1/4)L^(3/4) and L=16 whilst K=16. under the...

A) imagine an economy with a production function of Y=100K^(1/4)L^(3/4) and L=16 whilst K=16. under the assumptions of neoclassical model, compute the equilibrium value of the real rental rate of capital.

B) Which of the following is not the cause of structural unemployment? (minimum wage law, efficiency wages, unemployment insurance, the monopoly power of unions)

Expert Solution

According to the neoclassical theory of distribution, the real rental price is equal to the marginal product of capital (MPK). If MPK rises, the real rental price also rises.

Rental rate of capital = MPK= Y/K.

Given a Cobb Douglas production function Y= F(L,K)= 100K^1/4L^3/4.

= MPK= 100x 1/4K^(1/4-
1)L^3/4. =100x 1/4K^(-3/4)L^3/4.

=100(1/4)(L/K)^3/4.

=100(1/4)(16/16)^3/4 = 100(1/4)(1)^3/4 = 25

Real rental rate of capital : MPK= r/p, where p= price level in the market( since price level is not given, we consider p=1)

Therefore, r= MPK

r= 25.

Rahul Sunny answered 2 years ago

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