Assume That a Competitive Economy Can Be Described by a Constant

question 50

Essay

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.

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Definitions:

Interest Rate

The amount charged by a lender to a borrower for the use of assets as a percentage of the principal.

Profit

Profit denotes the financial gain achieved when the amount of revenue gained from a business activity exceeds the expenses, costs, and taxes needed to sustain the activity.

Capital Goods

Long-lasting goods acquired or created by businesses to produce other goods or services, including machinery, buildings, and equipment.

Consumer Goods

Products that are purchased for consumption by the average consumer, including durable goods, non-durable goods, and services.