If increased immigration raises the labor force, the neoclassical theory of distribution predicts:
A) the real wage will rise and the real rental price of capital will fall.
B) both the real wage and the real rental price of capital will fall.
C) both the real 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 the neoclassical theory of distribution, an increase in the labor force due to increased immigration would lead to a decrease in the marginal productivity of labor. This would cause the real wage to fall as employers would be able to hire more workers for the same wage. However, the increase in the labor force would also lead to an increase in demand for capital, causing the real rental price of capital to rise. Therefore, the correct answer is that the real wage will fall and the real rental price of capital will rise.

If Increased Immigration Raises the Labor Force, the Neoclassical Theory