In the Solow model with technological progress, by increasing the efficiency of labor at rate g:
A)the real wage and the real rental price of capital both grow at rate g.
B)the real wage grows at rate g but the real rental price of capital is constant.
C)the real wage is constant but the real rental price of capital grows at rate
D)g. both the real wage and the real rental price of capital are constant

Question

Quizplus · Accepted Answer

In the Solow model with technological progress, the real wage grows at the rate of technological progress but the real rental price of capital is constant. This is because technological progress increases labor productivity and the marginal product of labor, which increases wages. However, the marginal product of capital remains constant, so the rental price of capital does not change.

In the Solow Model with Technological Progress, by Increasing the Efficiency