Use the neoclassical theory of distribution to predict the impact on the real wage and the real…

(i) 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.

(ii) Suppose that an economy’s production function is Cobb–Douglas with parameter = 0.3.

(a) What fractions of income do capital and labor receive?

(b) Suppose that immigration increases the labor force by 10 percent. What happens to total output

(in percent)? The rental price of capital? The real wage?

(c) Suppose that a gift of capital from abroad raises the capital stock by 10 percent. What happens

to total output (in percent)? The rental price of capital? The real wage?

Attachments:

Assignment-1.pdf