Question

Suppose that there is an increase in the capital stock. 1.) Using the line drawing tool, show the effect of this change on the labor market. Properly label your new line. 2.) Using the point drawing tool, identify the new equilibrium real wage and employment. Label this point 'F' Carefully follow the instructions above, and only draw the required objects. NS 0 ND

Answer 1

As capital stock increases then it will change the total output. The purchases of new capital stock will increases the efficiency of technology, and it leads to rise in the marginal productivity of the labour. The rise in capital stock then the production function will shift to the right. Due to the rise in the marginal productivity of the labour, then the demand for the labour will also increases and the labour demand curve shifts to the right. It increases the real wages because labour takes more effort to work. It shows in the following diagram;