Assume That a Competitive Economy Can Be Described by a Constant

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.