Question

Suppose that the economy is in equilibrium. If the supply of labor increases, then A.Output will...

Suppose that the economy is in equilibrium. If the supply of labor increases, then

A.Output will increase, the real rental price of capital will stay the same and the real wage rate will increase

B.Output will increase, the real rental price of capital will increase and the real wage rate will decrease.

C.Output will stay the same, the real rental price of capital will stay the same and the real wage rate will decrease.

D.Output will stay the same, the real rental price of capital will decrease and the real wage rate will decrease.
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Answer #1

Answer.) C.Output will stay the same, the real rental price of capital will stay the same and the real wage rate will decrease.

According to the neoclassical theory of distribution, the real wage equals the marginal product of labor. Because of diminishing returns to labor, an increase in the labor force causes the marginal product of labor to fall. Hence, the real wage falls. The real rental price equals the marginal product of capital.Since the marginal product of capital stays the same and, hence, there is no change in real rental price of capital.

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