Questions

Explain how a competitive, profit-maximizing firm decides how much of each factor of production to demand.

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.
a. A wave of immigration increases the labor force.
b. An earthquake destroys some of the capital stock.
c. A technological advance improves the production function (meaning, it increases Y relative to the amount of K and L needed).

Figure 3-5 in our book shows that in U.S. data, labor's share of total income (Y) is approximately constant over time. Table 3-1 shows that the trend in the real wage closely tracks the trend in labor productivity. How are these facts related? Could the first fact be true without the second fact being true?

Why does the neoclassical theory assume constant returns to scale?

How do factor prices impact factor input decisions in the classical model?

What effect did the Black Death in Europe have on aggregate labor productivity? On wages? Why do some economic historians believe this event helped fuel the Industrial Revolution?

What determines consumption and investment, according to the classical model?

What does the PPF with capital and consumption goods tell us about present and future quality of life (measured in terms of consumption).