Question

1. Use the neoclassical theory of distribution to predict the impact on the real wage and the real rental

price of capital of each of the following events:

a. A wave of immigration increases the labor force.

b. An earthquake destroys some of the capital stock.

c. A technological advance improves the production function.

d. High inflation doubles the prices of all factors and outputs in the economy.

2. If a 10 percent increase in both capital and labor causes output to increase by less than 10 percent, the production function is said to exhibit decreasing returns to scale. If it causes output to increase by more than 10 percent, the production function is said to exhibit increasing returns to scale.

Why might a production function exhibit decreasing or increasing returns to scale?

(This problem requires the use of calculus.)

Consider a Cobb–Douglas production function with three inputs. K is capital (the number of machines), L is labor (the number of workers), and H is human capital (the number of college degrees among the workers).

The production function is

Y =5 K 1/3 L1/3 H 1/3.

a. Derive an expression for the marginal product of labor. How does an increase in the amount of human capital affect the marginal product of labor?

b. Derive an expression for the marginal product of human capital. How does an increase in the amount of humancapital affect the marginal product of human capital?

c. What is the income share paid to labor?

What is the income share paid to human capital?

In the national income accounts of this economy, what share of total income do you think workers would appear to receive?

(Hint: Consider where the return to human capital shows up.)

d. An unskilled worker earns the marginal product of labor, whereas a skilled worker earns the marginal product of labor plus the marginal product of human capital.

Using your answers to parts (a) and (b), find the ratio of the skilled wage to the unskilled wage. How does an increase in

the amount of human capital affect this ratio? Explain.

3. Suppose that an increase in consumer confidence raises consumers’ expectations about their future income and thus increases the amount they want to consume today. This might be interpreted as an upward shift in the consumption

function. How does this shift affect investment and the interest rate?

4. Suppose that the government increases taxes and government purchases by equal amounts. What

happens to the interest rate and investment in response to this balanced-budget change?

Explain how your answer depends on the marginal propensity to consume.

5.Suppose that consumption depends on the interest rate. How, if at all, does this alter the conclusions reached in the chapter about the impact of an increase in government purchases on investment, consumption, national saving, and the

interest rate?

Answer 1

ans 1=

The neo-classical /marginal productivity concept of distribution states that factors of production are paid as per their marginal products; & each of those marginal products are positively-linked to the level of the other inputs & the level of technology.

1. The real wage diminishes from the higher supply of labor; with more & more labor employed, the MP of (& demand for) capital augments, increasing the actual rental price of capital.
2. The real rental price level of capital escalates with the fall in the supply of capital; with less capital, the MP of (& demand for) labor falls which decreases the real wage rate of labor.
3. Both the real wage & rental price of capital rise, as the technical advance increases the MPs of (& demands for) labor & capital.
4. The rate of inflation doubling creates no change in the real wage & rental price of capital – the nominal wage rate, the nominal rental price level of capital, & the price level of the output all have doubled, however, the relative prices & wage rates are unchanged.