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.
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, the destruction of capital stock reduces the supply of capital, leading to an increase in the rental price of capital. At the same time, the reduction in capital also reduces labor productivity, leading to a decrease in the real wage. Therefore, 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