In the model with uncertainty and capital, how is the equilibrium real wage determined?

It will adjust so that equilibrium profits equal zero.

It will equal the marginal product of labour.

It will adjust so that output equals consumption.

It will equal the marginal rate of substitution between consumption and leisure for the household.

Solutions

Expert Solution

Answer - Option B

It will be equal to marginal product of labor

In the model with uncertainity , where the capital is present , the real wage rate equals the marginal product produced by the labor. This is the equilibrium level of the real wage rate. Equilibrium profits and output with consumtion are not compared here. Hence Option B will be correct.

Rahul Sunny answered 1 year ago

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