Question

Consider an economy with the following production function: Y = AK1/2L 1/2 where A is some constant representing the level of technology. Under the assumptions of the Neoclassical model, if there is a rise in the level of the technology constant, A, (with no change in supplies of labor or capital), this will make the real wage ____ and real rental rate of capital ____.

rise, fall

not change, not change

fall, rise

rise, rise

fall, fall

not change, rise

Answer 1

rise , rise

( A technical progress will result in Increase in production. Since labour and capital are the only factors employed in production Increase in production resulting from the use of advanced technology can be attributed to an increase in marginal product of both capital and labour. Real wage depends on the marginal product of labour. So Increase in the marginal product of Labour results in an increase in real wage. Real rental rate of capital depends on marginal product of capital. Increase in marginal product of capital leads to a rise in real rental rate of capital.)