What determines the distribution of national income between labor and capital in a competitive, profit-maximizing economy with constant returns to scale?
A)the relative quantity of labor to capital A
B)the interest rate
C)the ratio of public saving to private saving
D)the marginal productivity of labor relative to the marginal productivity of capital

Question

Quizplus · Accepted Answer

In a competitive, profit-maximizing economy with constant returns to scale, the distribution of national income between labor and capital depends on the marginal productivity of labor relative to the marginal productivity of capital. If the marginal productivity of labor is higher than the marginal productivity of capital, then labor will receive a larger share of national income. Conversely, if the marginal productivity of capital is higher than the marginal productivity of labor, then capital will receive a larger share of national income. Therefore, choice D is the correct answer.

What Determines the Distribution of National Income Between Labor and Capital