Assume that a competitive economy can be described by a constant returns to scale (Cobb-Douglas) production function, and all factors of production are fully employed. Holding other factors constant, including the quantity of labour and technology, carefully explain how a one-time, 50-percent decrease in the quantity of capital (perhaps the result of war damage) will change each of the following:

a.the level of output produced
b.the real wage of labour
c.the real rental price of capital
d.capital's share of total income

Question

Assume that a competitive economy can be described by a constant returns to scale (Cobb-Douglas) production function, and all factors of production are fully employed. Holding other factors constant, including the quantity of labour and technology, carefully explain how a one-time, 50-percent decrease in the quantity of capital (perhaps the result of war damage) will change each of the following:
​
a.the level of output produced
b.the real wage of labour
c.the real rental price of capital
d.capital's share of total income​​

Quizplus · Accepted Answer

The Answer of Assume that a competitive economy can be described by a constant returns to scale (Cobb-Douglas) production function, and all factors of production are fully employed. Holding other factors constant, including the quantity of labour and technology, carefully explain how a one-time, 50-percent decrease in the quantity of capital (perhaps the result of war damage) will change each of the following:
​
a.the level of output produced
b.the real wage of labour
c.the real rental price of capital
d.capital's share of total income​​

Assume That a Competitive Economy Can Be Described by a Constant