According to the neoclassical theory of distribution, if firms are competitive and subject to constant returns to scale, total income in the economy is distributed:
A) only to the labor used in production.
B) partly between labor and capital used in production, with the surplus going to the owners of the firm as profits.
C) equally between the labor and capital used in production.
D) between the labor and capital used in production, according to their marginal productivities.

Question

Quizplus · Accepted Answer

According to the neoclassical theory, total income in the economy is distributed between the labor and capital used in production according to their marginal productivities. This means that each factor of production (labor and capital) is paid according to the quantity and quality of their contribution to the production process. Therefore, the factors that are more productive and scarce will receive a higher reward than those that are less productive and abundant. This leads to a more efficient allocation of resources and higher aggregate output.

According to the Neoclassical Theory of Distribution, If Firms Are