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
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

The distribution of national income between labor and capital in a competitive, profit-maximizing economy with constant returns to scale is determined by the marginal productivity of labor relative to the marginal productivity of capital. In other words, the wages and profits received by labor and capital, respectively, are based on their respective contributions to production. If labor is more productive than capital, then wages will be relatively high and profits will be relatively low. Conversely, if capital is more productive than labor, then profits will be relatively high and wages will be relatively low.

What Determines the Distribution of National Income Between Labor and Capital