If all wage income is consumed, all capital income is saved, and all factors of production earn their marginal products, then:

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Quizplus · Accepted Answer

If all factors of production earn their marginal products, this implies that the economy is efficient and there are no market failures. Under these conditions, the economy will reach a steady-state level of capital stock that maximizes consumption, as predicted by the Golden Rule level. Allowing for capital income to be saved ensures that some of the production is invested, leading to capital accumulation and growth until the steady-state is reached. With all wage income being consumed, this means that current consumption is being maximized, subject to the Golden Rule level of capital stock. Therefore, the economy will reach a steady-state level of capital stock equal to the Golden Rule level.

If All Wage Income Is Consumed, All Capital Income Is