If an earthquake destroys some of the capital stock, the neoclassical theory of distribution predicts:
A)the real wage will rise and the real rental price of capital will fall. both the real
B)wage and the real rental price of capital will fall. both the real
C)wage and the real rental price of capital will rise.
D)the real wage will fall and the real rental price of capital will rise.

Question

Quizplus · Accepted Answer

According to neoclassical theory, when the capital stock is destroyed, the production process becomes less productive which leads to a decrease in both the real wage and the real rental price of capital. However, since the capital stock is now scarcer, the demand for it increases causing the real rental price of capital to rise. Meanwhile, since output has decreased, the demand for labor falls leading to a decrease in the real wage. Thus, the neoclassical theory predicts that the real wage will fall and the real rental price of capital will rise.

If an Earthquake Destroys Some of the Capital Stock, the Neoclassical