Assume that a competitive economy can be described by a constant returns to scale (Cobb-Douglas) production function and all factors of production are fully employed. Holding other factors constant, including the quantity of labor and technology, carefully explain how a one-time, 50-percent decrease in the quantity of capital (perhaps the result of war damage) will change each of the following:

a. the level of output produced;
b. the real wage of labor;
c. the real rental price of capital;
d. capital's share of total income.

Question

a. the level of output produced;
b. the real wage of labor;
c. the real rental price of capital;
d. capital's share of total income.

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The Answer of Assume that a competitive economy can be described by a constant returns to scale (Cobb-Douglas) production function and all factors of production are fully employed. Holding other factors constant, including the quantity of labor and technology, carefully explain how a one-time, 50-percent decrease in the quantity of capital (perhaps the result of war damage) will change each of the following:

a. the level of output produced;
b. the real wage of labor;
c. the real rental price of capital;
d. capital's share of total income.

Assume That a Competitive Economy Can Be Described by a Constant