Use the neoclassical theory of distribution to predict the impact on the real wage and the real rental price of capital of each of the following events:
1.1. A wave of immigration increases the labor force.
1.2. An earthquake destroys some of the capital stock.
1.3. A technological advance improves the production function.
A wave of immigration increases the labor force.
According to the neoclassical theory of distribution, the real wage
equals the marginal product of labor. Because of diminishing
marginal product of labor, an increase in the labor force causes
the marginal product of labor to fall. Hence, the real wage falls.
With more workers available to work with the capital stock, an
additional unit of capital produces more additional output. This
increase in the marginal product of capital leads to an increase in
the real rental price of capital.