Macro Ch 3 End of Chapter Problems

National Income: Where It Comes From and Where It Goes — End of Chapter Problem 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 events described below. Assume that production follows a Cobb-Douglas production function. a. If a wave of immigration increases the labor force, then the real wage would increase, and the real rental price of capital would increaseincreaseremain unchanged. b. If high inflation doubles the prices of all factors and outputs in the economy, the real wage would , and the real rental price of capital would

decrease, increase remain unchanged, remain unchanged

a. The marginal product of labor (MPL) can be expressed as , and the marginal product of capital (MPK) can be expressed as . In a competitive economy, firms pay a real wage (W/P) equal to the marginal product of labor (MPL) and a real rental rate (R/P) equal to the marginal product of capital (MPK). Note that the total income of labor is equal to the product of the real wage and the total quantity of labor employed. Likewise, the total income of capital is equal to the product of the real rental rate and the total quantity of capital employed. Use this information to answer the following questions. b. Labor's total income can be expressed as , and capital's total income can be expressed as . c. This means that labor receives of total income, and capital receives of total income.

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