According to the neoclassical theory of distribution, in an economy described by a Cobb-Douglas production function, when average labor productivity is growing rapidly:
A) labor's share of total income will be increasing.
B) labor's share of income will be decreasing.
C) workers will experience high rates of real wage growth.
D) economic profits will be positive.

Question

Quizplus · Accepted Answer

According to the neoclassical theory of distribution, labor's share of total income will be constant in the long run, and real wage growth will match the growth in average labor productivity. Therefore, when average labor productivity is growing rapidly, workers will experience high rates of real wage growth. Option A is incorrect because labor's share of total income is constant in the long run. Option B is incorrect for the same reason, and furthermore, the opposite of what is happening since real wage growth is increasing. Option D is irrelevant to the question because positive economic profits are not tied to labor productivity growth.

According to the Neoclassical Theory of Distribution, in an Economy