Question

According to the neoclassical theory of distribution, a worker’s real wage reflects their productivity. Let’s use this insight to examine the incomes of two groups: teachers and doctors. Let W_t and W_d be the nominal wages of teachers and doctors, P_t and P_d be the price of education and doctor visits, and MP_t and MP_d be the marginal productivity of teachers and doctors.

a.   Over the past century, the productivity of doctors has risen substantially because of technological progress. According to neoclassical theory, what should happen to the doctors’ real wage, W_d/P_d ?

         b.   Over the same period, the productivity of teachers MP_t has remained constant. What should happen to teachers’ real wages, W_t/P_t ?

         c.   Suppose in the long run, workers can move freely between being teachers and doctors. What does this mobility imply for the nominal wages of teachers and doctors, W_t and W_d?

      d.   What do your previous answers imply for the price of doctors relative to the price of education P_d ? Explain.

            P_t

Answer 1

Summary:

Given the details of income of two groups teachers and doctors.

based on this details the questions given are answered as below.